By Michael Winfrey
Economics Correspondent, Central Europe and the Balkans
PRAGUE, Oct 17 (Reuters) - The financial crisis has pounded
central Europe's markets and prompted forecasts of recession in
some of its fast-growing economies as they struggle to overcome
the double-whammy of dried-up credit and slower Western demand.
Once confident of immunity to the liquidity crisis that has
hit banking in more developed states, the Baltics and Balkans
are no longer laughing, while the more stable Hungarians, Czechs
and Poles have been put on guard.
Although analysts and officials here say emerging European
banks are generally sound -- none have needed government help --
all have taken emergency steps to jump start frozen-up interbank
and bond markets needed for their economies to function.
Most exposed are those whose expansions have been fuelled
largely by foreign borrowing -- a practice that brought Iceland
close to economic ruin and raised doubts on Ukraine, the
Baltics, Romania, Bulgaria and Hungary.
Add to that the dramatic slowdown in the region's main
export market, the euro zone, and economists are slashing their
growth forecasts for the entire region.
"These small and open economies will be hit by a drop in
external demand, a drop in capital and financial inflows (mainly
FDI and bank borrowing), and will face downward pressure on
their currencies," JP Morgan analyst Nora Szentivanyi wrote.
"We expect Central European economies to face recessionary
risks during 2009 with weakness likely to carry well into 2010."
Top executives and policy makers will discuss steps they are
taking to fight the crisis and their new forecasts in a series
of exclusive interviews at the second Reuters Central European
Investment Summit in Vienna and Warsaw, from Oct. 20-22.
Besides policymakers, senior executives from Unicredit, one
of the biggest foreign banks active in the region, and Hungary's
largest independent bank OTP will also speak, along with
representatives from top energy and media companies.
CRUNCHED AND SQUEEZED
The Baltic states are either already in recession or racing
for it, with the borrowing-fuelled economic boom that saw
imports flood into Latvia, Estonia and Lithuania screeching to a
halt after lenders turned down the taps for new loans.
Romania and Bulgaria are seen continuing their heady
expansion, but are at risk due to their wide external deficits.
But economists agree that unlike in Iceland, banks in the
EU's biggest ex-communist newcomers -- Poland, the Czech
Republic, Slovakia, and Hungary -- have little exposure to the
toxic debt that has caused lenders to collapse elsewhere.
Hungary's problem is more related to high foreign currency
borrowing, while the rest are also facing falls on stock markets
and currencies and a scarcity of foreign funds as western banks
hoard cash because they too are feeling the credit crunch.
That will impact growth already suffering by the Western
slowdown. Hungary's central bank sees growth slowing to less
than 1 percent in 2009, from an earlier forecast of 2.6 percent.
The Czech Finance Ministry has slashed its 2009 growth forecast
to as low as 3.6 percent, from 4.4 percent.
As growth slows, so does inflation, and analysts now expect
central banks across the region to start cutting interest rates
sooner than expected, or at least to halt tightening cycles, but
they also said countries may face budget problems.
"Public finances are likely to come under pressure in the
entire region on the back of a significant slowdown in growth
and sharply rising funding costs," said Lars Christensen, chief
analyst at Danske Bank.
The crisis raises other policy questions, like whether the
ex-communist states should rush to adopt the single currency --
Poland is aiming for 2012, and Hungary may be about to set a
date -- or whether market turbulence can torpedo those plans.
Central bankers from Hungary, the Czech Republic and
Slovakia, as well as Polish Deputy Finance Minister Katarzyna
Zajdel-Kurowska will discuss these issues at the summit.
EXTRAORDINARY MEASURES
Budapest went hat in hand to the International Monetary Fund
this week for a last-resort safety net after its bond and
foreign currency swap markets seized up and its forint currency
suffered wild swings including a one-day drop of 7 percent.
The request was unprecedented for a European Union state --
economies that are supposed to need no mentoring from the global
lender -- and Budapest also asked the European Central Bank for
help boosting liquidity -- another first for a non euro zone
member.
According to analysts, with $250 billion of loanable funds,
the IMF is well placed to help the region out.
Hungary's relatively small current account gap of 4.5
percent of GDP makes it much less exposed than the Baltics and
Balkans, where that figure is 15-20 percent, while Budapest also
has a lower short-term debt refinancing needs than they do,
giving it more time to sort out its problems.
That's the good news.
"The bad news is that even if the worst case scenario is
averted, GDP growth in the 'super-deficit' countries is likely
to slow sharply next year," said Capital Economics in a note.
"With the exception of the Baltics, outright recession is
not yet our central forecast for these countries. But it is
looking more possible by the day."
(Reporting by Michael Winfrey; editing by Patrick Graham)
