Eastern Europe the binge is over – MoneyWeek

Nowcapitalinflowshavegroundtoahalt。 Whileprivateflowsintotheregionreached$241bnin2008,thisyearwillseeanoutflowof$27bn,saystheInstituteforInternationa

Nowcapitalinflowshavegroundtoahalt。

Whileprivateflowsintotheregionreached$241bnin2008,thisyearwillseeanoutflowof$27bn,saystheInstituteforInternationalFinance。

Banks,whoholdmostoftheexternaldebtandhavehaddifficultyrefinancing,areclampingdownoncreditgrowth,underminingdomesticdemand。

Insomecountriesthebankingsystemhasalmostcollapsed,necessitatingrescuesbytheInternationalMonetaryFund(IMF),whichhasbeencalledinbyHungary,Romania,Serbia,LatviaandUkraine。

Allthisexplainswhyfirst-quarterGDPfellby6。

4%year-on-yearinRomania,5。

8%inHungary,3。

4%intheCzechRepublic,16%inEstoniaandastartling18%inLatvia。

Ifthelatterseconomykeepsshrinkingatitscurrentrateitwillalmosthalvethisyear。

TheBalticsareinaparticularlynastypickle。

Theimbalancesweregreatestthere,soretrenchmentisboundtobepainful。

Butwhatsmakingthingseventougheristhefactthattheircurrenciesarepeggedtotheeuro。

TheBalticshavehighlevelsofforeigncurrencydebt–euro-denominatedmortgagesinLatviaareworth40%ofGDP–soendingthepegbydevaluinglocalcurrencieswouldbedisastrous,causingdefaultstosky-rocket,saysLexintheFT。

Thismeanstheregionishavingtolowerdomesticdemand–inotherwords,clampdownonwagesandprices–torestoreitscompetitiveness。

Andtheeconomicfreefallissettocontinue。

Wedonotseethisasthebottom,saysLarsChristensenofDanskebank。

Thegoodnewsisthatoutrightdisasterseemstohavebeenaverted。

TheIMFsresourceshavebeenbeefedupto$750bn。

Thisinput,alongwithmoneypledgedbytheEUandthemultilateraldevelopmentbanks,seemsmorethanenoughtoaddressthefundingproblemsintheregionandhelprecapitalisethebankingsectors,accordingtoarecentBankofAmericaSecurities-MerrillLynchresearchreport。

Buteconomicrecoveryisalongwayoff。

Bankingproblemsarefarfromresolved,withnon-performingloansstillaround3%andexpectedtoexceed10%,accordingtoCapitalEconomics。

ThegroupalsonotesthattheflipsideofIMFhelpistighterfiscalpolicy,whichwillmaketheslowdownworse。

Alastingupturnwouldrequirearecoveryintheglobaleconomyandespeciallyintheeurozone,easternEuropesmaintradingpartner,andaresumptionincapitalinflowstobolstergrowth。

Thelatterseemespeciallyunlikelywhilethecreditcrisisgrindson,saysFAZ。

net。

DontcountonasustainablebullmarketineasternEuropefortheforeseeablefuture。

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