S&P: New report ranks emerging european sovereigns on vulnerability to a U.S. recession

/Standard & Poor's, London, March 05, 08/ - The worsening growth outlook for the U.S. and the global economy will create significant challenges for capital-addicted emerging European sovereigns, particularly those with large economic imbalances such as Estonia, Iceland, and Latvia. The slowdown will principally affect emerging Europe via reduced capital inflows into the region. In a new report published on March 3 titled "Measuring Emerging European Vulnerabilities: The Cyclical Sensitivity Index," Standard & Poor's Ratings Services has created a Cyclical Sensitivity Index (CSI), which aims to measure the relative vulnerability of 18 non-EMU European sovereigns rated A+' and lower in the event of a protracted U.S. or global recession. "We are already seeing an impact of the credit squeeze on the real economies of those sovereigns where private sector leverage is at its highest," Standard & Poor's credit analyst Frank Gill said. "It is no coincidence that the four highest scorers in the CSI study - Latvia, Iceland, Estonia, and Kazakhstan - are all showing the first symptoms in 2008 of decelerating growth, as are several other sovereigns ranking in the top 10 on the CSI. From a ratings perspective, it is noteworthy that the ratings on Latvia, Iceland, and Estonia are all currently on negative outlook, while Kazakhstan was recently downgraded." "A protracted U.S. slowdown could reverse so far resilient risk appetite, with the consequence that central banks in those European countries with both high gross external financing needs and considerable reliance upon non- resident participation in government security markets-in particular Hungary and Turkey-would be forced to tighten monetary policy, despite their natural inclination to ease in the face of weakening demand," Mr. Gill said. The report also notes that several regional economies have become increasingly reliant on FDI inflows, particularly into property, to finance large current account deficits-the most conspicuous being Georgia, Bulgaria, Montenegro, and to a lesser degree Turkey and the Ukraine. "To the degree that FDI into emerging Europe has, with the clear exception of the CEE-4, gone into non-tradeable sectors, these inflows may be perpetuating the widening of regional current account deficits over the medium term and hence gradually increasing the region's external financing dependency," Mr. Gill added. Cyril Audrin provided research assistance for this report. Primary Credit Analyst: Franklin Gill, London, (44) 20-7176-7129; frank_gill@standardandpoors.com Secondary Credit Analyst: Moritz Kraemer, Frankfurt, (49) 69-33-99-9249; moritz_kraemer@standardandpoors.com Additional Contact: Sovereign Ratings; SovereignLondon@standardandpoors.com [2008-03-06]