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Bulgarian Stress Test For The Balkans

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http://www.telegraph.co.uk/finance/newsbys...he-Balkans.html

The Baltic trio of Latvia, Lithuania, and Estonia are lucky. At the end of the day, they can count on Swedish banks and the full might of the Swedish state to shield them from economic disaster.

The picture is messier in the Balkans, a region with eight times the population (55m) and no obvious Big Brother at hand, and messiest of all is Bulgaria where Sofia mayor Boiko Borissov inherits what he calls "the complete collapse of the country" after crushing the ruling socialists in elections over the weekend.

The former karate coach, who learned his politics as body-guard to Communist boss Todor Zhivkov and premier Simeon Saxe-Coburg-Gotha (ex child-king), has vowed to extirpate the local mafia and to stop the budget deficit "blowing up".

Like Latvia, Bulgaria has pegged its currency to the euro, with equally grim results. Monetary policy was too loose earlier this decade for the needs of a fast-growing catch-up economy.

The current account deficit reached 25pc of GDP in 2008, the highest of the 80 emerging markets around the world tracked by Fitch Ratings. Gross external debt reached 102pc. The property boom was out of control. If Latvia is any guide - fifteen months ahead of Bulgaria in the cycle - prices could fall 50pc.

"The macro-situation in Bulgaria is dire," said Lars Christensen, emerging markets chief at Danske Bank.

"Foreign investment has plummeted. The downturn in the economy accelerated in May and June. While the new government is an improvement, I would not rule out a drop in GDP of 15 to 20pc from peak to trough," he said.

"My concern is that this is going to spill over into other countries. If you look at the main lenders, they are Greece, Hungary (OTP bank), and Italy."

The Greek central bank has already told lenders - chiefly the National Bank of Greece, EFG Eurobank, Alpha, and Pireaus - not to divert any of Greece's €28bn rescue package to Balkan subsidiaries on grounds of "credit risk".

This breaches an EU-wide accord for banks to stand by subsidiaries in Eastern Europe, but Athens may have little choice as its own economy wilts.

The great fear earlier this year was that a devaluation by Latvia would set off a chain reaction as pegs snapped across the region, with risk of contagion into the eurozone itself through the Achilles heels of Greece and Austria. West European banks have lent €1.7 trillion to the ex-Communist bloc.

The G20 deal in April to triple the fire-fighting fund of the International Monetary Fund to $750bn has bought time, while the Spring recovery has made it easier for East Europeans to roll over foreign debt. But the core issue has not been resolved.

The IMF usually demands that deficit countries devalue as a condition for any bail-out so that they can export their way back to health. This time the EU has insisted on fixed-peg orthodoxy.

Neil Shearing from Capital Economics said there are hopeful signs that the deflation cure could ultimately succeed. "Latvians are accepting 20pc wage cuts. It is painful but the adjustment is starting to work. There are obvious risks, but we don't think there will be an Asian-style crisis in Eastern Europe," he said.

Yet pessimists abound. Hans Redeker, currency chief at BNP Paribas, said these countries are being sentenced to gruelling deflation. "We could see unemployment reach 20pc or higher in Bulgaria. It is going to lead to social instability," he said.

The risks vary by country. Romania is a fiscal mess, but it has more room for maouvre with a floating currency. It has already secured a $26bn IMF lifeline.

Samir Patel from Research2 said Serbia, Croatia, Macedonia, Albania, Montenegro, and Bosnia will all need a "continuous flow of rescue capital" to prop up their systems. "If the Baltics are a bad dream for Sweden, the Balkans could become a nightmare for Greece, Italy and Austria. Southern Europe is quite literally at risk of economic seizure," he said.

Mr Patir said fixed-pegs had trapped countries in a "tangled financial web". "West Balkan currencies cannot possibly withstand what is unfolding. As happened in Argentina, we expect that euro loans will be converted to local currencies, giving an immediate write-down shock to those who have extended credit."

The entire system is on the brink, it's holding on by it's finger tips something is going to give and when it does it will create a huge domino effect. The question is who's going to blow first.

The entire planet has run out of money.

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http://www.telegraph.co.uk/finance/newsbys...he-Balkans.html

The entire system is on the brink, it's holding on by it's finger tips something is going to give and when it does it will create a huge domino effect. The question is who's going to blow first.

The entire planet has run out of money.

what a mess the high financiers have caused

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Actually quite a sober article by AEP's recent standards. Reading between the lines, I think Bulgaria will make it.

I'm not so sure. The ECB policies are about saving the lender banks and the currency pegs. The people can go to the wall - what would seem the complete opposite of a stimulus package.

The ECB is at odds here with the IMF, which recommended either devaluation or fast-tracking into the Euro. So most of the loans to Bulgaria or Latvia go into supporting the currency and keeping foreign trade uncompetitive. The one thing Eastern Europe had going for it was that it was cheap, but now it isn't.

Laying off millions and cutting wages can't work in isolation, can it? Witness the problem in California: earlier it made some cuts and hiked a few taxes but the tide of joblessness decimated revenues and opened the budget gap even wider.

Never mind the 20% pay cuts, schools and hospitals are closing in Latvia. Even the Soviet occupation wasn't as grim as that of the Swedish banks. 'Social unrest' might be an understatement for what ensues.

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When the EU realises its a straight choice betwen saving countries like

A : France, Spain, Greece, Germany and Italy

B : the other newer members and balkan and baltic blocks.

I guarantee you know which choice the EU will make. B will be let go to hell so the other countries can pick them up on the cheap later.

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Actually quite a sober article by AEP's recent standards. Reading between the lines, I think Bulgaria will make it.

I think they will also, however they have a lot of pain to come. (don't we all!)

One of their greatest advantages is their location as the gateway to the East (via Turkey) freight and pipelines will generate revenue, and their strategic positioning and membership of NATO will mean "life support" should they require it.

If you spend some time in BG you will realise that a large proportion of the population of rural Bulgaria especially in the mountainous regions to the south of the country probably wont notice any change.

Edit: clarity

Edited by Bubble&Squeak

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I think they will also, however they have a lot of pain to come. (don't we all!)

One of their greatest advantages is their location as the gateway to the East (via Turkey) freight and pipelines will generate revenue, and their strategic positioning and membership of NATO will mean "life support" should they require it.

If you spend some time in BG you will realise that a large proportion of the population of rural Bulgaria especially in the mountainous regions to the south of the country probably wont notice any change.

Edit: clarity

they might not notice much in the rural bulgaria, but in the towns and cities where the people drive around in new BMW's and earn next to nothing, it is totally all built on image and debt, i think they are going to be hit very very hard, bit like us then, :lol:

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I wouldnt mind having my bulge area stress tested for ballkans

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I'm working with a Bulgarian, he is currently in the process of buying a rather large house from distressed sellers. He said that he wasn't worried if he didn't get this one at the price he wanted because there are plenty more people just starting to default who're desperate to offload their mortguages.

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