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Anticipating second wave of economic crisis

Krizė
„Reuters“/„Scanpix“ nuotr. / .
Šaltinis: 15min
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In 1998-1999, the Lithuanian economy was shaken by the Russian crisis; 2008 saw the onslaught of the global economic downturn. What is happening in 2012 and should the country fear the second wave of the recession?

US strategy consultant Carter Schelling said back in 2008 when he was discussing the threat of a downturn: “If you are fearing a recession, don't panic! Or panic first!”

It seems that Lithuania currently follows this rule to the letter. Even though some economic indicators – stock exchange indices and company turnovers – contradict the gloomy outlook.

Lithuanian exports to Germany remain stable, while in some sectors – like timber and furniture – successfully grow. Nevertheless, President Dalia Grybauskaitė is uncompromising: The second wave of the crisis, she says persistently, should reach Lithuania in late 2012 and linger until well into 2013.

Chairman of the board of the Investors Association Vytautas Plunksnis notes that a crisis is defined as a period when people massively lose jobs and there is no money in the market: “Crises usually strike after economic overheating, which is not the case now. Banks lend very cautiously and only to low-risk projects, while entrepreneurs who can still vividly recall the last crisis make investment decisions after thorough deliberation. Business now is more flexible than in 2008, so there is no basis for anticipating mass firings or closing down of factories, even if demand in Europe drops somewhat.”

He acknowledges, however, that there can be no one-word diagnoses for what is happening in 2012.

“There is nothing particularly bad, but one can sense that, in some quarters, there is a paranoia about a crisis approaching. The anxiety is fuelled by debt crises in European and some other developed countries, fears of the euro zone breakup,” Plunksnis tells 15min.

According to him, states cannot just write off their debts overnight, while only economic growth and austerity can bring some relief, so we will be seeing scaremongering headlines about problems in some countries for years to come.

Licking wounds from 2008

“I couldn't claim that a wave of some new problems is approaching, yet I could say that we are still solving the problems from 2008. Another thousand companies should go under this year,” says Aurimas Valaitis, director of bankruptcy administration and legal services bureau.

He specifies that prior to 2008, companies had gone bankrupt in those sectors that were ready for market consolidation – namely, pharmacy, meat processing. The effects of the global economic downturn first struck Lithuania's transportation companies. They began going under in summer 2008, while the property market cracked in the second half of 2009.

“The passing away of all these companies was due to one factor – indebtedness to banks exceeded their business potential. If the time to repay their loans coincided with the economic crisis, there were only two options – putting up additional collateral or going under,” Valaitis explains.

The ratio of bankrupt to working companies now stands at about 2 percent, but bankruptcies are very painful and they “burn” immense sums of money.

As the crisis went into full swing, Valaitis says, banks changed their tactics: “Before that, we, bankruptcy administrators, knew exactly what our job was – to sell bankrupt companies' assets for the highest price and meet as many of the biggest creditors' claims as possible. And now banks, biggest creditors of most companies, press us to auction the assets as soon as possible for a third of their hypothec value, as the buyers are usually affiliates of those same banks.”

This has led to real estate companies owned by banks buying up a lot of property.

“The last several years demonstrated that a bank is not a business partner to small and mid-sized enterprises, since whenever time comes to collect the loan, it squeezes the last penny out of its client. Moreover, decisions on business loans are not even made in Vilnius,” Valaitis notes.

Bad times even in France

“This year, tourists have hedgehogs living in their pockets – they share one pizza in a restaurant, order the cheapest wine on the menu, and scout for last-minute vacation offers, bargain in shops, choose to spend their holidays at their friends' or relatives' to avoid paying for accommodation,” joke small businessmen from Issigeac in Dordogne, south-west of France.

The tourism season that lasts April to October brings to life this town of just over 500. Money made during these months supports 3 restaurants, 3 teahouses, a pizza place, 3 bead-and-breakfast hostels, 3 bars, 3 barber shops, a beauty parlour, 2 real estate agencies, an antique shop, an interior design shop, a vintner, 3 bakeries, a shop of local produce, a florist, a glassblower, Renault and Citroen repair centres, a solicitor's office, several art workshops, and a gallery run by Lithuanian Erika Umbrasaitė, called Papillion Boheme.

She sells handmade jewellery by Lithuanian, French, British, American artists, Lithuanian linen clothes and accessories, holds art exhibitions.

Owners of hostels and hotels in Issigeac and across France complain that their clientèle in June and July was 15 to 50 percent smaller than last year. Merchants' and restaurant owners' income also dropped 10 to 20 percent.

In June and July, French and foreign tourists were deterred by changing and particularly nasty weather, the British pound crisis, economic upheavals in Spain, and shaky outlook for the euro. Situation is even more aggravated by continuing talks about France sitting on a financial volcano.

The Lithuanian entrepreneur opened Papillion Boheme three years ago and now the gallery has a faithful clientèle of locals and tourists. This year, Umbrasaitė says, she has been particularly cautious about what to buy and whether to buy at all.

During our meeting, a guest strolls into the shop through an open door – not a good-humoured tourist but a brown squirrel. It lopes past a nicely decorated window, but soon runs back to the forest.

Umbrasaitė grins: “Can this all be explained by the crisis alone, or is it merely panicking consumers who anticipate another crisis?”

Unease and uncertainty

“Markets are very uneasy, there is much uncertainty. Situation changes very fast, so one must travel a lot, since Europe will clearly have fewer capital-attracting projects and deals that all investment banks will want a piece of,” says Darius Daubaras of BNP Paribas bank who is in charge of Russian CIS, and Central-Eastern European markets.

Some EU countries are already experiencing the second wave of recession, since their economies are stagnant. The United Kingdom has also seen its economic growth slowing down over the last two quarters, presenting a number of challenges.

“Even though restaurants and bars in London are full of clients, other small businesses complain that the country's banks are tight-fisted when it comes to extending loans and providing funds,” Daubaras comments.

Many British middle class families, he says, must struggle to make ends meet, as most of their income goes towards paying for kids' education, paying taxes, and living expenses. Salaries are frozen while food prices are rising. Brits do not go abroad as often, they use their cars less, since petrol prices are surging too.

“No one in the world has a crystal ball to be able to tell for sure what will happen to Europe; however, there are several scenarios under discussion. So in the coming months or years, a lot will depend on decisions by European politicians and the European Central Bank alone,” Daubaras assures.

Northern Europe – the UK, the Netherlands, Scandinavia, Germany, and perhaps the Baltic countries – is more competitive than the South. Greece, Spain, Italy have grave problems with their productivity and fiscal policies.

Of the latter group, Italy is probably faring best, since it has a big and diversified industry, while some Spanish regions are already seeking support.

In early September, EU leaders will convene to discuss common banking control. Another key issue – the development scenario for bankrupt Greece. Besides, the question of whether Spain will be forced to seek help from the International Monetary Fund and the European Central Bank will be in the air.

“One could say that we are sitting in the epicentre of a hurricane, with risky developments circling around us, so all we can do is wait to see how the problem of European coordinated action is solved,” Daubaras summarizes.

Another rope on the neck

Lithuania's entrepreneurs would sit through crises more easily, if they were taught not only how to start and develop a business, but also how to end it in a civilized way.

“Lithuanians still do not regard bankruptcy as a sometimes unavoidable procedure that helps prevent huge troubles and continue working, but rather as a great evil, something deplorable,” says bankruptcy administrator Valaitis.

Many businesspeople, he says, come to bankruptcy administrators with no hope about the future of their business and then leave ready to go on working.

“However, this summer Lithuania's parliament came up – completely out of the blue – with an amendment to the Bankruptcy Law. If it comes to pass, I do not know what I will be able to advise businessmen and how we, bankruptcy administrators, will have to work,” he shrugs.

The proposed new phrasing seems to operate on the assumption that if a business goes bankrupt, it is done deliberately by its managers. For instance, poorly administered work in a company, according to the proposed law, can be seen as evidence of deliberate bankruptcy.

The bill also obliges bankruptcy administrators to seek, within twenty days of filing for bankruptcy, a court's ruling that the bankruptcy was deliberate, if the company's manager or owner fails to hand over all or part of the company's documentation to the administrator.

According to Valaitis, determining whether owners handed over all documents and assets to the administrator is only possible after reviewing the company's deals – i.e., within 6 or, in certain cases, 12 months from filing for bankruptcy.
Bearing this in mind, Valaitis says, administrators will be forced to always go to court and ask to recognize the bankruptcy as deliberate, for fear of being accused of inaction.

“And the bill comes at a time when we are facing the possibility of a second wave of crisis. So if it is passed and comes into effect in January 2013, there will be many legal disputes and businesses will be forced to defend themselves – and that will be very difficult to do,” Valaitis warns businesspeople about a New Year present from the government.

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