Baltic States in the ″Danger Zone″ Say Economists | Europe| News and current affairs from around the continent | DW | 18.10.2008
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Baltic States in the "Danger Zone" Say Economists

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 published this week.

A man walks past a screen showing the European stock markets fall in Paris

The major European markets may have labored but worse could follow further east

"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.

IMF ready to bailout any faltering Baltic state

International Monetary Fund's Managing Director Dominique Strauss-Kahn

IMF chief Strauss-Kahn says funds would be available

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."

The three Baltic stock exchanges lost more ground Thursday, continuing a bad week on the financial markets.

Tough week for Baltic exchanges

The graph of German stock index DAX is seen in Frankfurt, central Germany

Baltic exchanges have been taking hits all week

The NASDAQ OMX Tallinn exchange closed down 2.54 per cent, Riga was down 3.82 per cent and the largest of the three Baltic exchanges in Vilnius dropped even more sharply, down 5.29 per cent.

The Baltic Benchmark Index (BBI) which includes data from all three exchanges, closed down 4.50 per cent at 322.13.

All three exchanges experienced similar falls Wednesday, with the decline coming on the back of the downbeat report released by Danske Bank noting Baltic exposure to Credit Default Swap (CDS) risks.

Biggest loser of the day was a former stock market darling, Lithuanian investment company Invalda, which shed 14 per cent of its value.

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