LONDON (AFX) – The concerns related to high current account deficits of some emerging European countries could lead to a crisis similar to the Asian crisis of 1997 are misplaced, Moody’s Investors Service said.
In a report titled ‘International Policy Perspectives’, Moody’s however said the vulnerability to capital outflows and the associated output contraction and balance sheet adjustments is rising, with potentially serious implications and policymakers have very few viable options to address the problems.
The report focuses on the group of European countries with a current account deficit equal to or higher than 10 pct of GDP. These are the three Baltic countries of Latvia, Lithuania and Estonia as also Romania and Bulgaria.
‘Current account deficits in these countries have reached very high levels, prompting fears that a repeat of the Asian crisis could be in the making. Such concerns are aggravated by the countries’ fixed or heavily managed exchange rates – usually a recipe for financial disaster,’ says Pierre Cailleteau, Moody’s Chief International Policy Analyst and author of the report.
‘However, comparisons with Asia 1997 ignore the nature of EU integration, which lends support to a realistic real income convergence scenario and reduces considerably the risk of a sudden and prolonged halt to external financing,’ Cailleteau added.
The Asian crisis is not the relevant reference for these countries, which are in fact more exposed to a ‘Portuguese syndrome’ — economic stagnation brought about the slow adjustment of overextended balance sheets in the private sector,’ Cailleteau said.
‘EMU accession, which may ironically be facilitated by the materialisation of such a deflationary scenario, will eventually remove any balance of payment risk. However, it would not eliminate the need to get through the painful unwinding of financial excesses,’ he noted.
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