>Will Eastern Europe catch cold? (CITI)

■ Western Europe’s turmoil has affected financial markets in Central and Eastern Europe (CEE) worse than anywhere else; not a surprise given the importance of “neighbourhood risk”. CEE faces three channels of contagion: a “financial” mechanism that works via European banks’ exposure to CEE; a “real” mechanism that threatens CEE export growth if Eurozone woes deepen; and a “thematic” mechanism in which investors might target CEE economies with large debt burdens. ■ Although these three mechanisms pose a risk, there are a number of factors that help cushion CEE: the region’s credit-dependence has fallen, partly as a result of the post-Lehman adjustment process they’ve gone through; and with the exception of Hungary, public debt burdens remain low in spite of the crisis.

■ On balance, though, any deepening of the Eurozone crisis will keep CEE vulnerable relative to other emerging economies. As a rule we think the strongest CEE countries are likely to be those where competitiveness is relatively high; where economies are relatively closed; where Western European banks have shown little desire to exit, and where their exposure is relatively small; and where public debt burdens generate few concerns. Poland, Romania and Ukraine seem to be a lot better-protected on these measures than, say, Hungary.

To read the full report: EASTERN EUROPE