Baltics, Balkans brace for hard landing

By Michael Winfrey - Analysis

PRAGUE (Reuters) - The credit crunch has killed a consumer-led boom in the European Union's Baltic newcomers and now threatens the bloc's Balkan economies with a bumpy economic landing at best.

Latvia and Estonia are in recession, and economists expect Lithuania to see a sharp drop in growth this year.

To the south, Romania and Bulgaria are expected to actually accelerate, but analysts say chances are growing that their fast-paced economies will slam on the brakes as credit dries up.

"A credit crunch would have a devastating impact on these economies, which have heavily relied on credit growth to finance the expansion," BNP Paribas said in a report.

"Even in those countries that are not burdened by excessive external and/or domestic imbalances, a credit crunch would markedly reduce the growth rate."

Of the biggest ex-communist EU economies -- Poland, the Czech Republic and Hungary -- only the last has relatively high exposure to foreign currency loans. But all are suffering from a slowdown in the euro zone that has hit their exports.

On the positive side, less credit could help let some air out of huge Baltic and Balkan current account deficits and blunt the bite of high inflation due to waning consumer demand.

But a worst case scenario includes a protracted collapse in growth that will led to a deep recession and job losses that could set these countries years back in their goal to catch up with their richer EU counterparts.

BALTIC WOES

The global credit crunch has hit emerging markets -- the Icelandic crown dropped 23 percent in one move on Monday -- as investors pull out of traditional higher-risk, higher-return assets and hoard cash due to trouble finding cheap ways to borrow.

That has exacerbated a crisis in Latvia and Estonia that started with a retreat of Scandinavian banks last year which popped the housing bubble, one major driver of growth.

"We expect to see negative growth in both Estonia and Latvia during 2008 and 2009," said Anssi Rantala, Nordea economist for the Baltics. "We think the recession will be a protracted one. Growth will not pick up before 2010."

On Friday, ratings agency Fitch downgraded Lithuania, Latvia and Estonia and kept their outlooks negative, citing worries about the countries' current account deficits.

Lithuania has so far withstood the storm best, with growth easing only to 5.2 percent in the second quarter, from 8.8 percent in all of 2007. But Estonia's economy contracted by 1.1 percent, from 7 percent for last year.

Economists say Latvia may come off relatively worst, with growth diving to 0.1 percent between April and June, from 11 percent a year earlier.