Thursday, October 18, 2007

Eastern European Economies are inflating

Will the new EU member states become the East Asian crisis for this decade? These economies are inflating like mad, their macroeconmic fundamentals are deteriorating, while house prices are rocketing into the stratosphere.

These economies have the smell of disaster about them.

Eastern Europe to reap its own subprime crisis

Soaring inflation across Central and Eastern Europe has begun to derail the region's booming economy, setting off alarms bells at the IMF and raising the risk of a monetary crunch.

Inflation in Bulgaria (12pc), Latvia (11.4pc), Kazakhstan (8.6pc), Russia (9pc), Estonia (7.2pc), Lithuania (7.1pc), and Romania (6pc) has reached levels that will force the authorities to slam on the brakes, endangering banks that have allowed credit growth to mushroom out of control.

Those countries that rely most on foreign debt to fund their housing booms – often
financing mortgages in euros, Swiss francs, or even Japanese yen – are already
facing a buyers' strike.

Money market rates have rocketed and the cost of default insurance has yet to settle back after spiking in August. "This could easily become Europe's subprime crisis," said Lars Christensen, Danske Bank's chief economist for Eastern Europe.

"The macro picture is deteriorating dramatically. On almost all indicators, the extremes are worse than during the East Asia crisis in 1997-1998. We have a story of over-leveraging and asset bubbles with massive excesses that are clearly unsustainable. Look at Latvia, where the current deficit has reached 30pc of GDP, and it is not much better in Bulgaria and Romania," he said.

"They could do this when easy money was on tap but that's not available any more after the global credit crunch. The situation is already turning quite serious. The money markets are basically not functioning in the Baltics," he said.