Baltic states in the "danger zone" say economists

Oct 17, 2008, 9:59 GMT

Riga - The three Baltic states of Estonia, Latvia and Lithuania are among those that could experience an Iceland-style economic crisis according to two new reports.

'The markets are asking the question 'Which country will be the next to fall?' The markets seem to have decided that Hungary will be the next Iceland. However, there are other countries that share some unpleasant similarities with Iceland,' said a Danske Bank report.

The Baltics make it onto a list of 15 countries Danske Bank thinks are 'in the danger zone' and 'at risk of a significant slowdown and increased financial distress' as a result of their large current account deficits, high credit growth in recent years and asset market bubbles, notably in real estate.

'It is not a given that these countries will undergo a similar collapse as Iceland, but we think market participants should be very careful in these markets,' Danske Bank advised.

A similar conclusion was drawn in a briefing note issued by London-based Capital Economics, though it suggested Ukraine and not Hungary is the most vulnerable economy in Central and Eastern Europe at the moment.

'The good news is that the IMF has ample funds to bail out the Ukraine, or indeed any country in the region that comes under funding pressure,' Capital Economics said.

'The bad news is that even if the worst case scenario is averted, GDP growth in the 'super-deficit' countries is likely to slow sharply next year. With the exception of the Baltics, outright recession is not yet our central forecast for these countries. But it is looking more possible by the day.'