(Repeats story published late on Monday)
* Hard landing seen for Latvia, Estonia, a risk in Lithuania
* Growth in Romania, Bulgaria still accelerating, but credit
crunch could mean rapid slowdown and drop in FDI
* Hungary seen country most exposed among CEE-3
* Region's currency board pegs to the euro seen surviving
* Click [] for factbox on region's banking sectors
By Michael Winfrey
PRAGUE, Oct 6 (Reuters) - The credit crunch has killed a
consumer-led boom in the European Union's Baltic newcomers and
now threatens the bloc's Balkan economies with a bumpy economic
landing at best.
Latvia and Estonia are in recession, and economists expect
Lithuania to see a sharp drop in growth this year.
To the south, Romania and Bulgaria are expected to actually
accelerate, but analysts say chances are growing that their
fast-paced economies will slam on the brakes as credit dries up.
"A credit crunch would have a devastating impact on these
economies, which have heavily relied on credit growth to finance
the expansion," BNP Paribas said in a report.
"Even in those countries that are not burdened by excessive
external and/or domestic imbalances, a credit crunch would
markedly reduce the growth rate."
Of the biggest ex-communist EU economies -- Poland, the
Czech Republic and Hungary -- only the last has relatively high
exposure to foreign currency loans. But all are suffering from a
slowdown in the euro zone that has hit their exports.
On the positive side, less credit could help let some air
out of huge Baltic and Balkan current account deficits and blunt
the bite of high inflation due to waning consumer demand.
But a worst case scenario includes a protracted collapse in
growth that will led to a deep recession and job losses that
could set these countries years back in their goal to catch up
with their richer EU counterparts.
BALTIC WOES
The global credit crunch has hit emerging markets -- the
Icelandic crown dropped 23 percent in one move on Monday -- as
investors pull out of traditional higher-risk, higher-return
assets and hoard cash due to trouble finding cheap ways to
borrow.
That has exacerbated a crisis in Latvia and Estonia that
started with a retreat of Scandinavian banks last year which
popped the housing bubble, one major driver of growth.
"We expect to see negative growth in both Estonia and Latvia
during 2008 and 2009," said Anssi Rantala, Nordea economist for
the Baltics. "We think the recession will be a protracted one.
Growth will not pick up before 2010."
On Friday, ratings agency Fitch downgraded Lithuania, Latvia
and Estonia and kept their outlooks negative, citing worries
about the countries' current account deficits [].
Lithuania has so far withstood the storm best, with growth
easing only to 5.2 percent in the second quarter, from 8.8
percent in all of 2007. But Estonia's economy contracted by 1.1
percent, from 7 percent for last year.
Economists say Latvia may come off relatively worst, with
growth diving to 0.1 percent between April and June, from 11
percent a year earlier.
Without new abundant sources of credit, firms are struggling
to find funds, and economists said a "hard landing", which
happens when an economy abruptly goes from a period of expansion
to recession, was already underway.
"Latvia is facing at best a period of stagflation and at
worst a full blown recession the like of which has not been
experienced in post-Soviet Latvia," said the Riga-based Baltic
International centre for Economic Policy Studies.
"Cumulatively the Latvian economy may lose more than two
years worth of GDP growth relative to the previous trend."
BALKAN SHADOWS
Romania's leu currency has dropped 10 percent since Sept.
12, the day before U.S. investment bank Lehman brothers filed
for bankruptcy, starting a new phase of the credit crisis.
The issue here is that, unlike the Baltics and its southern
neighbour Bulgaria who fix their currencies to the euro in
currency board regimes, Romania's floating leu poses risks.
That means that households could face higher debt payments
on loans taken in foreign currencies, which "could lead to
problems for corporates and households, and potentially a
collapse of the FX borrowing cycle", JP Morgan said.
Another problem is that Romania's 3-month interbank rate has
risen 3.5 percentage points since March. Western parent banks
now account for 70 percent of local bank financing, which could
dry up if credit markets in western European remain bogged down.
In Bulgaria, which has seen booming growth in the real
estate and construction sectors, the government expects growth
to slow to 6 percent or slightly less next year, from 7.1 in the
first half of 2008, but some analysts say it fall to 4 percent.
"The main source of trouble is the squeeze on consumption in
case foreign equity swiftly withdraws from the real estate and
construction sectors," 4Cast said in a report. "The resulting
rise in unemployment reduces household's abilities to meet their
credit obligations."
BANKS, CURRENCIES
Central bankers across the region have clamoured to reassure
depositors and investors that their banking sectors are sound.
But economists warn that countries with wide current account
deficits and whose financial sectors are most exposed to foreign
currency loans will face the most pressure.
Despite those dangers, none of the four ex-communist EU
countries with regimes pegging their currencies to the euro --
Latvia, Lithuania, Estonia or Bulgaria -- are expected to
devalue their units, because doing so could potentially spark a
banking crisis, even if the pegs hurt growth.
"Irrespective of any turmoil globally, the Bulgarian economy
will continue to adjust within the currency board arrangements
and the existing fixed exchange rate," said Bulgarian central
bank Governor Ivan Iskrov. "This is our permanent anchor."
(Reporting by Michael Winfrey; editing by Patrick Graham)
