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Macroeconomics  |  June 11, 2012 16:39:54

Leaving Greece from the euro area and its impact on Central and Eastern Europe

Greece and Poland and the Czech Republic encountering only in the group of European football championship. They are part of the current dismal economic situation. His eventual departure from the euro area may reveal some vulnerabilities Central European economies. We expect 50-75% probability Grexitu over the next 12-18 months. How this would hit the economies of Central and Eastern Europe? (Source: Citibank)

Direct economic and trade links between Central Europe and the euro area periphery are weak, perhaps with the exception of Bulgaria and Romania. Growth of the region is much more dependent on the performance of Germany other than Greece or other crisis-affected economies. Main potential channels of infection in Central and Eastern Europe thus stems either from the banking system, or outflow of portfolio investment.

Bank channel:Given the ownership structure of banks in Bulgaria and Romania to a greater extent the shocks stemming from the periphery area. Even the Hungarian banking system appears to be vulnerable due to dependence on foreign financing with high-profit loans (NPL ratio) and because of regulatory and tax burden on the financial sector.

The outflow of capital: Poland is among the economies of Central and Eastern Europe in the last three years, enjoyed large inflows of portfolio investment (12% of GDP). If Grexit lead to a significant increase in risk aversion, these positions will probably be reduced. In this case, the Polish zloty seems to be quite vulnerable due to a combination of high current account deficit of balance of payments and its relatively unfavorable financing structure, which is in contrast with the Czech Republic (excluding reinvested earningsalmost balanced current account) and Hungary (surplus).

Reaction of economic policy: In most economies of Central and Eastern Europe have fiscal authorities some room for maneuver that allows the operation of automatic stabilizers in the case of large negative shocks. Hungary is an exception due to the high government debt. We believe that it reduces the responsiveness of economic policy, which means more likely that Hungary will take the IMF conditions for financial assistance.

IW special: Greek parting with the euro area

CEE countries which are most at risk?

Analysis of key vulnerabilities in the region suggests thatBulgaria, Hungary and Romania would face the biggest problems when Grexitu. Poland looks much stronger, but we expect that the contagion effect in the form of a weak exchange rate. In our opinion, the Czech Republic seems the least vulnerable, so if we see a significant drop in foreign demand, which, given the current political tensions could freeze the response of economic policy.

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