Debt, growth in question for east EU

A surge in portfolio inflows is flooding into emerging central Europe, although yield-hungry investors are picking solid policy and higher growth over countries still struggling to put the crisis behind them.

After deep contractions across the region, a two-speed recovery is underway, with countries boasting better debt fundamentals like Poland and the Czech Republic for the moment ahead of those who depend on foreign lending.

Investors are also dipping into countries like Hungary, but struggles by the new center-right Fidesz government to get its budget deficit under control mean it is lagging for now, along with fellow International Monetary Fund benefactor Romania.

"There has... been clear differentiation between the more robust and the weaker economies of the region," Goldman Sachs wrote in a research note on the region.

"We believe that the region's stronger economies -- namely, Poland, Turkey, Israel and the Czech Republic -- will be the first to see an acceleration in financial inflows both in debt and, increasingly, equity." Turkey and Israel are often grouped with emerging European markets.

Extremely easy monetary policy in the world's developing economies, including expectations the Fed will push ahead with more asset-buying, plus continued worries over debt in troubled euro zone countries like Greece and Ireland have helped push investors into these higher-yielding countries.

But these new, more volatile, portfolio flows carry risks.

Having supplanted the greenfield projects, reinvested dividends, and bank lending that fueled export and consumer spending booms earlier this decade, they are more exposed to selloffs in the event of a Lehman-style global shock, which wiped 30 percent off the zloty's value versus the euro.

Regional pressures, from budget battles to whether Germany's exports will continue to fuel recovery, will also weigh.

More than a dozen policymakers, bankers and corporate officials will discuss this and other issues at the Reuters Central European Investment Summit in exclusive interviews in Vienna, Warsaw, London and New York from October 11 to October 13.

Flows, Risks

With slower growth and hard-to-escape ties to the EU's ailing periphery, Emerging Europe has lagged Asia and Latin America in luring investors, but that has picked up since July.

According to the Institute of International Finance, capital flows to Emerging Europe, including Turkey and Russia, are likely to triple to $180 billion this year, even if they remain at a third lower than the 2004-2008 average.

Boosted by the victory of an austerity-minded government and low national debt, the Czech crown has led the region since July, rising 7.4 percent versus the euro. Poland's zloty has climbed 4.28 percent and Warsaw's WIG index 12 percent.

[Source: By Michael Winfrey, Reuters, Economics Correspondent, Central Europe and the Balkans, 09Oct10]

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