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Financial stress: A long night for emerging Europe

Economic conditions may appear to be easing, but the region’s biggest challenges still lie ahead.

As Brazil slaps on a capital tax to prevent the creation of asset bubbles, governments in emerging Europe can only look on with envy. If only they had a problem of buoyant currencies and strong capital flows.

Still, some analysts believe that financial stresses have eased substantially in the region. They argue that bright spots have emerged, such as the economic upturns in France and Germany, which are key export markets for central and eastern Europe and providers of foreign capital to it. There are signs too that portfolio investors are returning to these markets. In the week ending October 23, flows into dedicated Russia equity funds reached $450 million, according to EPFR Global, the highest weekly inflow since the company began tracking such data in the first quarter of 2002. Flows into EMEA equity funds hit a 71-week high at $677 million. Also, CDS spreads for most sovereigns have come back to their pre-Lehman Brothers’ bankruptcy levels, indicating that investors believe that the worst is over.

Yet anyone that thinks that is either brave or foolhardy. Central and eastern Europe still faces the prospect of further debt crises and devaluations. Take Latvia. Last month, the government announced tentative plans that it would cap the amount that banks could claim from mortgage holders.

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