Roubini : The Economic Crisis In East & West Europe (article helps in understanding depth of crisis

[RedEarth]

The Central and Eastern Europe region is the sick man of emerging markets. While the global crisis means few--if any--bright spots worldwide, the situation in the CEE area is particularly bleak. After almost a decade of outpacing worldwide growth, the region looks set to contract in 2009, with almost every country either in or on the verge of recession.

The once high-flying Baltics--Estonia, Latvia, Lithuania--look headed for double-digit contractions, while countries relatively less affected by the crisis--the Czech Republic, Slovakia and Slovenia--will have a hard time posting even positive growth. Meanwhile, Hungary and Latvia's economies have already deteriorated to the point where International Monetary Fund (IMF) help was needed late last year.

Central and Eastern Europe's ill health is primarily driven by two factors: collapsing exports and the drying up of capital inflows. Exports were key to the region's economic success, accounting for 80% to 90% of gross domestic product in the Czech Republic, Hungary and Slovakia. By far the biggest market for CEE goods is the Eurozone, now in recession.

Meanwhile, the global credit crunch has sapped capital inflows to the region. An easy flow of credit fueled Eastern Europe's boom in recent years, but the good times are gone. According to the Institute of International Finance, net private capital flows to emerging Europe are projected to fall from an estimated $254 billion in 2008 to $30 billion in 2009. Whether this is formally considered a "sudden stop" of capital or not, it will necessitate a very painful adjustment process.

This begs the question: Is this a classic emerging markets crisis in the works?

What is especially worrisome is that the days of easy credit flows were accompanied by rising external imbalances that rival or even exceed the build-up of imbalances in pre-crisis Asia (for example, current account deficits in Southeast Asia from 1995-1997 fell within the 3% to 8.5% of GDP range, while those in Central and Eastern Europe were in the double digits in Romania, Bulgaria and the Baltics in 2008). The vulnerabilities in many CEE countries--high foreign-currency borrowing, hefty levels of external debt, massive current-account deficits--suggest the classic makings of a capital account crisis à la Asia in the late 1990s.

Will this spill over to the rest of the world? Like the Asia crisis of 1997 to 1998, a regional crisis in Eastern Europe would have far-reaching effects. As Harvard professor Kenneth Rogoff noted in a recent New York Times article: "There's a domino effect. International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall."

http://www.forbes.com/2009/02/25/eastern-europe-eu-banks-euro-opinions-columnists_nouriel_roubini_print.html

also.........

As It Falters, Eastern Europe Raises Risks

PARIS — Since the fall of the Berlin Wall, the countries of Eastern Europe have emerged as critical allies of the United States in the region, embracing American-style capitalism and borrowing heavily from Western European banks to finance their rise.

Now the bill is coming due.

The development boom that turned Poland, Hungary and other former Soviet satellites into some of Europe’s hottest markets is on the verge of going bust, raising worrisome new risks for the global financial system that may ricochet back to the United States.

http://www.nytimes.com/2009/02/24/business/worldbusiness/24euro.html?_r=1&ref=business