E.Europe seen weathering subprime storm for now

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Emerging European markets should weather the credit crisis storm sweeping across the world due to their limited exposure to the U.S. subprime mortgage market and strong local economies, analysts say.

Escalating problems in the high-risk U.S. subprime mortgages have squeezed global liquidity and threatened to trigger a seizure in the financial system and damage world growth.

However, analysts said the reaction in post-Communist Europe and the Balkans will remain subdued as the region's strong economic fundamentals soothe investors.

"Emerging market currencies have all showed a remarkable resilience considering the amount of stress and uncertainty," said analysts at BNP Paribas.

"Currency volatility (has) remained relatively contained and ... in (a) period of stress, the market seems to have developed enough discernment to see volatility in the majors increase faster than that in (emerging markets)."

Local money market rates edged up slightly across eastern Europe on Friday in the wake of the credit queeze, and currencies were mainly unscathed, dealers said.

Turbulence in global equities and credit markets has caused investors to shy away from risk and unwind carry trades, triggering a rise in low-yield currencies which have been used to fund such bets in high-yield markets.

NO LONGER EMERGING?

The Czech crown was up one-quarter of a percent on the session by midday.

The zloty also showed resilience, easing only 0.2 percent in the face of political uncertainty with Prime Minister Jaroslaw Kaczynski's Law and Justice (PiS) party set to decide on Saturday whether to heed opposition calls for an early election.

"It's all about the global scene, and the worries on credit and equity market inevitably translate into good news for low-yielding currencies like the yen and the crown as carry trades unwind," said Lauren Van Biljon, an analyst at 4Cast Limited in London.

BNP Paribas added the weathering of the crisis raises questions as to whether currencies such as the zloty should still be referred to as emerging market currencies at all.

Even the normally volatile Hungarian forint and Turkish lira appeared to be withstanding the full force of the liquidity crisis, easing around 0.6-0.8 percent.

Traders on the Hungarian money market noted thin liquidity, but chalked that up to a market swing that saw players put too much money -- around 513 billion forints ($2.79 billion) -- into the central bank's 2-week bill facility on Tuesday.

They said the situation should be resolved on Tuesday at the next auction.

Analysts said one factor working against the region as a whole, and Turkey and Hungary in particular, are large external debts and deficits.

This, said Lars Christensen, a senior analyst at Danske Bank, will keep emerging European markets on edge.

"Central and Eastern European markets in general are vulnerable, as most countries in the region run large current account deficits," he said.

"If credit concerns escalate further, we would expect especially those emerging markets with large external debts and deficits to come under additional pressure."

-- additional reporting by Marek Petrus in Prague, Dagmara Leszkowicz in Warsaw, Krisztina Than in Budapest. ($1=183.96 Hungarian Forint)

Keywords: MARKETS EAST/

[PRAGUE/Reuters/Finance.cz]