Emerging Europe pays more than other EM for the eurozone pain, says Fitch

The eurozone sovereign debt crisis is affecting the outlook for emerging Europe to a greater degree than other emerging markets, according to Fitch Rating’s global Sovereign Review and Outlook published today.

This reflects the region’s close trade, investment and financial linkages with the eurozone.

Emerging Europe is facing a sharp slowdown in growth to 2.7% in 2012 from 4.7% in 2011, steeper than emerging Asia, Latin America or the Middle East and Africa. Adverse developments in the eurozone are being felt primarily through the trade channel, with Bulgaria (picture) suffering a 5% drop in exports to the region in Q1.

Financial sector linkages to the eurozone have the potential to inflict greater damage in a downside scenario, Fitch added.

Eurozone bank claims on emerging Europe dwarf their claims on other regions, while eurozone banks own large stakes in CEE banking systems. High Greek parent bank ownership of local bank assets in Bulgaria (25%), Macedonia (25%), Serbia (16%) and Romania (13%) represents a risk in the event of extreme events in Greece, such an exit from the eurozone and bank deposit runs.

Nonetheless, the agency said on the whole the region is much better placed than it was in 2008-09 to react to external shocks.

“At an aggregate level, has made significant progress with fiscal consolidation, reducing fiscal deficits to near balance in 2011, helped by high oil prices for Russia, from over 6% of GDP in 2009. Public debt remains low at 29% of GDP,” Fitch said.

“With the exception of Hungary, emerging Europe, including Russia and Turkey, has escaped any sovereign downgrades so far in 2012. However, in the face of the deteriorating outlook for the eurozone, rating outlooks for emerging Europe have largely reverted to Stable from Positive,” said Paul Rawkins, senior director in Fitch’s sovereign rating team.

Kazakhstan (‘BBB’/Positive) is the only emerging European sovereign on positive outlook, while Hungary (‘BB+’) and Croatia (‘BBB-‘ ) are on negative outlook.

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