Reuters Summit-C.Europe economies dynamic, but problems loom

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By Boris Groendahl and Alan Crosby

Central Europe has evolved from a collection of Soviet Communist satellite states into the most dynamic part of the capitalist European Union in less than a generation.

While dwarfed by neighbour Russia and by China and India, its countries now combine the vibrant economic growth of an emerging market with the political stability and legal certainty that come with joining the EU.

But as growth accelerated since central European countries became EU members in 2004, it has driven up wages and prices; a credit boom may have fanned a housing bubble; the adoption of the euro currency is slipping; and current account deficits have ballooned, making doomsayers predict an inevitable collapse.

Problems in the U.S. housing and mortgage sector have also led to signs of a bubble in emerging markets, into which investors have stampeded in recent weeks, driving stock markets to record levels.

More than a dozen top executives and policy makers will discuss how to succeed in a region sometimes overlooked by investors focused on bigger emerging markets at the first Reuters Central European Investment Summit in Vienna, from Oct. 15-17, in a series of exclusive interviews.

"We still see a lot of opportunities in central Europe," said Andras Szalkai, a Stockholm-based portfolio manager at East Capital's Eastern Europe fund.

"Yes, growth opportunities may not be as big as in some other emerging markets but at the same time the risk-adjusted growth is still maybe the best and definitely worth looking at."

IMBALANCES UNWINDING?

The Summit comes at a time when major markets have been shaken by a credit squeeze sparked by a crisis in the U.S. subprime mortgage sector.

Eastern Europe has so far sidestepped most of the turbulence caused by the credit crunch, but several countries with large external balances remain vulnerable to a halt in financing flows, the World Bank said last month.

With substantial current account gaps and a reliance on bank-related inflows for financing, Baltic and Balkan countries, as well as Hungary, are at particular risk, given concerns that credit booms have fuelled a deterioration in credit quality.

The pinch might be felt first and hardest by banks active in the region, which include UniCredit's Vienna-based arm Bank Austria, Raiffeisen International and Hungary's OTP Bank . Executives from all three will be speaking at the Reuters Summit.

"We are not seeing any problems with credit quality while things are going well. But if those countries are going into a hard landing we may see that," said Lars Christensen, an emerging markets analyst at Danske Bank.

Some east Europe bears also point to signs of froth in the region's property market, a target of Austrian investors including Immoeast and Warimpex . Both will speak at the Summit.

INFLATION RISING

Price pressures have not been limited to the property market.

While inflation fell as economic adjustment took place in Eastern Europe, upward pressure is becoming evident and in some countries inflation is at a level where it is beginning to threaten stability.

Supply-side factors such as strong domestic wage pressures and higher energy and food prices have fuelled the trend and many new EU members appear far from being able to meet the euro entry criteria on inflation.

Only Slovakia is aiming to adopt the single currency by the end of the decade. Other countries have seen the timetable slip into the next decade. Central bankers from Slovakia, the Czech Republic and Poland will all speak at the Reuters Summit.

Public spending is also making euro adoption difficult, despite strong economic growth. Governments in the region have been broadly criticised for failing to take the opportunity to restructure spending.

"These countries need to run fiscal surpluses, scale back large-scale capital investment projects, keep wage growth in line with productivity, and use EU funds judiciously," Christoph Rosenberg, the IMF's senior regional representative who will speak at the Summit, recently told Reuters.

"Otherwise, they risk pouring oil into an already overheating economy."

While credit markets are in turmoil, the region's equity markets have been rising steadily.

Privatisations have given way to initial public offerings. Shares of energy firms, banks and telecoms have become market anchors while the stock markets in Prague, Budapest and Warsaw have posted double digit growth this year.

(For summit blog: http://summitnotebook.reuters.com/)

(Additional reporting by Sujata Rao in London)

Keywords: CEE SUMMIT/

[VIENNA/Reuters/Finance.cz]