Eastern Europe: the binge is over

Investing in eastern Europe used to be a 'licence to print money'. Now, the region is set to be the world's worst-performing this year.

How times change, says FAZ.net. Investing in eastern Europe used to be a "licence to print money". The CECE Index of Polish, Czech and Hungarian stocks rose fourfold in euro terms between 2003 and 2007. Now, emerging Europe is a "crisis zone" set to be the world's worst-performing region this year. Even though stockmarkets have bounced as global risk appetite has recovered since March, the CECE is still down by around 60% from its peak.

One key problem is the area's dependence on exports, which comprise 80% of GDP in Hungary and the Czech Republic and 50% in Ukraine. On top of this, unlike Asia or Latin America, eastern Europe is overleveraged. It has "binged on cheap capital from overseas to fund an unsustainable consumer boom", says Capital Economics. Huge current-account deficits (Latvia's reached 23% of GDP in 2007) and rocketing external debt (worth 50% and 37% of GDP in Latvia and Bulgaria respectively) show just how far beyond its means the region has lived.

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