The Euro Zone’s Default Position
WASHINGTON, DC – Kazakhstan may be far removed from the euro zone, but its recent economic experiences are highly relevant to the euro’s current travails. As the euro zone struggles with debt crises and austerity in its weaker members, Kazakhstan is emerging from a massive banking-system collapse with a strong economic recovery.
For most of the last decade, Kazakhstan gorged on profligate lending, courtesy of global banks – just like much of southern Europe. The foreign borrowing of Kazakh banks amounted to around 50% of GDP, with many of these funds used for construction projects. As the money rolled in, wages rose, real-estate prices reached to near-Parisian levels, and people fooled themselves into thinking that Kazakhstan had become Asia’s latest tiger.
The party came to a crashing halt in 2009, when two sharp-elbowed global investment banks accelerated loan repayments – hoping to get their money back. The Kazakh government, which had been scrambling to support its overextended private banks with capital injections and nationalizations, gave up and decided to pull the plug. The banks defaulted on their loans, and creditors took large “haircuts” (reductions in principal value).
We hope you're enjoying Project Syndicate.
To continue reading, subscribe now.
Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.
Already have an account or want to create one? Log in