ANALYSIS-Growing c/a gaps menace several E.Europe economies

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PRAGUE, Sept 19 (Reuters) - Burgeoning current account deficits threaten to derail several post-Communist European economies and delay hopes of joining the euro zone early next decade.

Analysts said the Baltic countries of Latvia, Estonia and Lithuania, along with their Balkan European Union counterparts Bulgaria and Romania are showing strong growth as their economies converge with richer western members of the bloc.

But with substantial current account gaps and a reliance on bank-related inflows for financing, they are at particular risk from recent financial market developments, especially given concerns that credit booms have fuelled a deterioration in credit quality.

"These countries need to run fiscal surpluses, scale back large-scale capital investment projects, keep wage growth in line with productivity, and use EU funds judiciously," Christoph Rosenberg, the International Monetary Fund's senior representative in the region, told Reuters.

"Otherwise, they risk pouring oil into an already overheating economy."

CONSUMER DRIVEN PROBLEM

In the late 1990s, several post-Communist countries such as the Czech Republic, Slovakia and Poland had rather large current account deficits, boosted by yawning trade gaps.

Most of those shortfalls, however, were caused by the importing of equipment and technologies into the private sector that helped turn economies around and eventually boosted productivity and exports.

Large flows of foreign direct investment financed the imbalance during that period, meaning countries were not forced to run up huge debts to pay for advancing their economies.

But analysts said the situation is different in the case in Latvia, which has the highest gap in the European Union, or Bulgaria, for example, both of which have double-digit current account deficits at 20.9 percent and 11.4 percent of GDP respectively.

Instead, consumers with new-found wealth from rising wages are helping drive economic expansion using credits -- much of which are taken through loans abroad -- to finance the growth.

Investors may soon begin to fear the situation will create an inflation spike that erodes the capital they devote to financing those external deficits.

CREDIT CRUNCH

Goldman Sachs strategist Thomas Stolper says financing the current account deficit may also be problematic given foreign banks' greater caution with loans -- the main source of Latvia's forex inflows -- amid the current global credit crunch.

"By and large the dynamics look unsustainable, something has to give," Stolper said.

"What is needed is a demand slowdown but the question is what leads to this, tighter fiscal policy, a potential tightening of credit conditions and possibly at some stage a devaluation, which also cannot be excluded."

The economy of Romania, which along with Bulgaria joined the EU at the start of 2007, could also face a hard landing given its external imbalances. Bulgaria aims to adopt the euro early next decade, while Romania is looking at 2014.

The Romanian leu has been weakening for weeks, and analysts said the bearish sentiment pushing it lower will continue given its strongly pro-cyclical fiscal policy and uncertain political situation.

"The Romanian economy is among the most imbalanced economies in the emerging markets universe," said Lars Christensen, senior analyst at Danske Bank.

"We place Romania in the same group of countries as the Baltic states and Bulgaria in terms of heightened risk of a hard landing in the economy and financial distress."

TOUGH QUESTIONS MAY FOLLOW

Even if a crisis does not bite, investors are going to start asking tougher questions of economic policymakers who have enjoyed years of easy credit which has enabled them to put off tough decisions needed for a final push towards the euro.

Last month ratings agency Fitch cut its sovereign credit rating on Latvia by one notch to 'BBB+' saying the economy was "severely overheating" and that government policy was "insufficient to restore sustainable growth".

"With euro adoption delayed until at least 2013, the support that potential EMU membership provides to Latvia's over-stretched external finances has diminished," said David Heslam, director in Fitch's Emerging Europe sovereigns group.

Latvia is looking to join the euro in 2012 or 2013.