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Markets, euro sink on eastern Europe warning
The deepening financial crisis in eastern Europe sent stocks and currencies sinking across the continent Tuesday, as fears escalated that troubles in former communist countries could wallop western Europe's already-stressed banking system.
Markets sagged after ratings agency Moody's said faltering economic conditions in eastern Europe would hit the local subsidiaries of major Western banks and potentially hurt their corporate parents, primarily in Austria, Italy, France, Belgium, Germany and Sweden.
Stocks and currencies fell across Europe. The euro dived over 2 U.S. cents to a three-month low of $1.2570, while Germany's DAX and France's CAC-40 slumped 3 percent.
A report by Danske Bank said "no currency in the region will be unaffected."
Danske analyst Lars Christensen said there was a certain inevitability to the collapse, because eastern Europe had high debt levels and had relied too heavily on foreign money to fuel high growth and a property boom that has now gone bust.
Foreign financing becomes more expensive when the local currency falls in value, and lenders are now much more tightfisted.
"Warsaw property prices went higher than Berlin and that made it clear that something was wrong," he said. "The markets have now decided that this region is the subprime of Europe."
Warsaw's WIG20 stock index was down 7.5 percent Tuesday and the Prague BCPP exchange hit a five year low, down 7.6 percent to 645.8 points. Over the past 12 months, the MSCI EM Eastern Europe index of stocks has plunged nearly 70 percent.
Currencies have been hard hit, with Poland's zloty slumping 15 percent in 2009 alone to 4.9 against the euro. That prompted Polish Prime Minister Donald Tusk to pledge government intervention in the foreign exchange market to prop up the currency if it falls to 5 zlotys.
The Czech koruna has fallen nearly 10 percent this year to 29.68 against the euro, its lowest since October 2005. Between Sept. 2008 and February, Hungary's forint fell 28.9 percent, the Ukrainian hrvynia 42.2 percent and the Russian ruble sunk 32.2 percent against the U.S. dollar.
The havoc Tuesday comes after months of deteriorating conditions.
Latvia, at least by one yardstick, is now in a depression, rather than just a recession. Growth has fallen 10.5 percent in the fourth quarter compared to a year earlier, and the country has received a massive bailout from the International Monetary Fund.
Hungary and Ukraine, both with huge budget deficits, have also gotten IMF funds, while the Russian banking system is staggering.
Now the illness is spreading and lashing countries like Poland and the Czech Republic, which until not so long ago boasted of strong economic fundamentals and expected to avoid the recession. As investors lose confidence in some eastern European markets, they are withdrawing from their market positions across the board, pushing currencies and stock markets down.
Neil Shearing, emerging Europe economist at Capital Economics, said it was slightly unfair that Poland and the Czech Republic have been dragged into the selling tide.
"The current decision en masse is to sell the lot, rather than differentiate," he said.
Austria's Raiffeisen bank, one of the banks identified by Moody's as most exposed to eastern Europe, rejected the suggestion its business was in trouble.
"We did not get involved in any kind of subprime business but focused on crisis-proof bank business," said bank spokesman Andreas Ecker-Nakamura, who added that the bank's international arm will register record profits for 2008.
A similarly optimistic tone was sounded by Austria's Die Erste, another bank highlighted by Moody's.
"2008 will be the best result in our history ... all our subsidiaries in central and eastern Europe are profitable," said bank spokesman Michael Mauritz. "We are a savings bank and we conduct the business of a savings bank and are convinced that this kind of business is particularly crisis resistant."
Mauritz said the region has "strong catch-up potential and will shrink less significantly than other countries in western Europe."
Capital Economics' Shearing thinks eastern Europe could see output contract by a massive 10 percent this year as it suffers what he termed a "sudden stop" in financing as international investors take their money out.
Western European banks moved into eastern Europe after those countries emerged from communist rule in 1990-91 and built a new banking system.
Russia, riding high on strong oil prices just six months ago, is facing its bleakest economic outlook in a decade. Government ministers say Russia will enter recession this year - reversing eight years of oil-fueled growth. The country's stock markets plunged 70 percent last year, while the national currency, the ruble, has shed nearly 35 percent of its value against the dollar since the summer. Industrial production, a key indicator for the health of the economy overall, plummeted in January.
Meanwhile, there are mounting fears of widespread defaults and bankruptcies as Russia's debt-laden corporations face difficulties refinancing their loans amid tougher lending conditions.