Crisis puts emerging EU at risk of recession

By Michael Winfrey

Economics Correspondent, Central Europe and the Balkans

PRAGUE (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 fueled 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 October 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-fueled 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.  Continued...