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Against the tide: Emerging Europe set for credit crunch contagion

Eastern Europe has borrowed cheaply this decade to fund a credit binge. Now, as the global credit crisis starts to bite, the region’s economies are becoming increasingly vulnerable.

The credit crunch is spreading around the globe. No region will escape its impact. The areas that will suffer most are those countries newly freed from Marxism that have empowered their people for the first time to purchase their own homes and invest in shares (financed by credit cards and bank loans). They have binged.

The property boom of 2000–05 enveloped eastern Europe in a big way. As these economies experienced accelerated growth and increased household incomes, easy money flowed in. Borrowing cheaply in Swiss francs or euros and lending for more in Polish zloty, Hungarian forint or Romanian leu, credit providers swept the property market upwards in a wave of liquidity.

Current accounts moved sharply into deficit, reaching more than 20% of GDP in some of the small Baltic states. Emerging Europe’s current account deficit is nearly 7% of GDP for the region as a whole. Sure, the region has enjoyed substantial improvements in economic fundamentals, such as export competitiveness, net foreign direct investment, banking systems and convergence with the eurozone. Even so, the extent of the liquidity boom has stretched these fundamentals to breaking point.

The credit boom is starting to bring inflation back onto the agenda.

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