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Eastern Europe 'in Danger Of A Hard Landing' - Daily Telegraph

Eastern Europe faces the growing risk of a ''hard landing" as the world's financial crisis spreads wider, with serious spill-over dangers for Scandinavian, Italian and Austria banks that have lent heavily to the region, the IMF has warned.

Current account deficits have reached extreme levels across much of the ex-Soviet bloc, hitting 22.9pc in Latvia, 21.4pc in Bulgaria, 16.5pc in Serbia, 16pc in Estonia, 14.5pc in Romania and 13.3pc in Lithuania.

"Eastern Europe has a cluster of countries with current account deficits financed by private debt or portfolio flows, where domestic credit has grown rapidly. A global slowdown, or a sharp drop in capital flows to emerging markets, could force a painful adjustment," said the fund in its Global Financial Stability Report.

The IMF said lenders in Eastern Europe had built up "large negative net foreign positions" during the boom, especially in the Baltic states. "Liquidity for these banks has all but dried up and [interest] spreads have widened 500 basis points."

Many of these countries rely on credit from branches of West European and Nordic banks, but these foreign lenders are having difficulty raising money on the global capital markets.

"A soft landing for the Baltics and south-eastern Europe could be jeopardised if external financing conditions force parent banks to contract credit to the region. Swedish banks, the main suppliers of external funding to the Baltics, could come under pressure," it said.

The IMF cited Dexia, Natixis, Raiffeisen, Danske Bank, Swedbank, Handlesbanken, Nordea, SEB, Intesa Sanpaulo and Rabobank as institutions that raise over 30pc or more of their money on the wholesale capital markets, and may therefore face constraints.

Belgium's Dexia is over 65pc reliant on this sort of funding. The Swedish banks are most vulnerable as the average debt maturity on their funds is less than four years. In Bulgaria and Romania there is a "danger that local banks may underestimate the deterioration in the quality of loan portfolios that often accompanies rapid credit growth".

Private credit grew 62pc in Bulgaria last year, 60.4pc in Romania, 55.2pc in Kazakhstan, 45pc across the Baltics and 39.6pc in Poland. All are above the safe speed limit.

The rapid growth of corporate debt issued by emerging market companies may prove a mixed blessing if the crisis persists, opening a "new potential channel of contagion".

So far, capital flows into these markets have held up well, often supported by the "carry trade" from Japan, Switzerland, and now the US. This may prove fragile.