Several Eastern European countries on verge of collapse

Warnings that the economic crisis could turn the clock back for ex-communist EU states, combined with panicky investors and political upheaval, have put the international spotlight on Eastern Europe.

In a month that has so far seen the resignation of the Latvian prime minister over the crisis and a halt to emergency IMF funding for Ukraine amid political infighting, investors are left to wonder what could be next.

Local currencies have plummeted in value, industrial output has plunged and once-buoyant economies have shrivelled - all in a region much-praised for its economic progress since the fall of the Berlin Wall in 1989.

And the signs for the months ahead are not encouraging as tensions emerge with the EU's richer member states and credit rating agency Moody's warns it may downgrade European banks because of their exposure to debts in the region.

"Compared with emerging markets in East Asia and Latin America, the EU's new member states entered the crisis weak," Indermit Gill, the World Bank's chief economist for the region, said on Friday.

Gill pointed to the region's "high public debt ratios, low foreign exchange reserves, rigid exchange rate regimes, and banks that depended more on foreign savings than domestic deposits."

In a particularly gloomy assessment for the region, French bank BNP Paribas warned in a research note on Friday that "several CEE (Central and East European) countries seem to be on the verge of collapse."

Gill said the commitment of the ex-communist countries in opening up markets and integrating into the global economy in sometimes-painful transitions had spurred growth and cut poverty.

But he warned that the progress made was now in danger because of a rising tide of protectionism in wealthier EU member states.

"If the world turns protectionist, developing countries will find it difficult to protect these hard-won gains," he said.

France in particular has raised hackles in the east with comments by President Nicolas Sarkozy against French automakers producing their cars in the Czech Republic only to then sell them back in France.

Many of the EU10 countries have enjoyed spectacular growth in recent years - often powered by domestic demand bolstered by easy credit - meaning their sharp slowdowns and recessions are a bitter pill.

The EU10 comprises the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia, which joined the European Union in 2004, and Bulgaria and Romania, members since 2007.

The decline in output is expected to reach double digits in the case of countries such as Latvia, which once topped the EU economic growth table.

In Ukraine, figures out this week showed that industrial output had plunged 34.1 per cent between January 2008 and January 2009.

The scale of the downturn is comparable to the industrial collapse that many of these countries experienced after the fall of the Soviet Union.

Spending cuts, rising unemployment and ingrained distrust of politicians have also fed violent street protests in Bulgaria, Latvia and Lithuania.

The turmoil in Latvia worsened further on Friday with the resignation of Prime Minister Ivars Godmanis, leaving the country without a government to work on a follow-up deal with the International Monetary Fund.

Hungary, Latvia and Ukraine are all receiving billions of Euros from the IMF to help their economies cope with the crisis. And officials say they will need many billions more to shore up their banking systems.

The crisis in Western Europe is a problem for the EU10 countries because that half of the continent is home to their top trading partners and investors.

Likewise Western Europe is affected by the crisis in the EU10 countries because of the debt exposure of its banks in the east.

Those countries in the region that have not yet switched to the Euro - only Slovakia and Slovenia have done so to date - have also faced heightened pressure on their currencies in recent weeks.

The Polish zloty has fallen by 40 per cent against the euro since July 2008, making it one of the world's most beleaguered currencies, despite forecasts that Poland could steer clear of recession this year.

The Hungarian forint, the Czech koruna and the Romanian leu have sunk.

The currencies recovered somewhat at the end of last week but Tomas Vlk, an analyst at Czech investment bank Patria Finance said they are still at risk.

"We may see a similar downswing again, because the problems in Central and Eastern Europe last," he said.

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