Eastern Europe update

Eastern Europe was hit hard during the last financial crisis, bounced back strongly in recent years with the support of strong foreign capital inflows but is potentially even more vulnerable today than in 2008 to a significant deleveraging because now Europe is at the centre.

As is typically the case in a global financial crisis, the countries that are most negatively impacted are those with significant reliance on foreign capital, large external debts denominated in a currency other than their own and significant economic trade ties with the countries directly affected by the crisis.

To varying degrees, Eastern European economies fit this broader description. The reliance on foreign capital, debts denominated in foreign currencies, weakening domestic currencies and budgetary challenges should also make it harder for these economies to stimulate domestically in response to deteriorating economic conditions.

Additionally, much of the banking system in the region is made up of subsidiaries to European banks, and as those banks look to sell assets in order to raise capital, the risk of diminished foreign capital availability increases further. We remain bearish on both the debt and currencies of Eastern European countries, with Turkey and Poland looking particularly vulnerable to us.

Looking across the countries in the region, Turkey and Poland in particular continue to rely on foreign capital to fuel economic activity and are vulnerable to contracting credit.

Hungary in some respects has made the most adjustments since the crisis, returning its current account to surplus and reducing the fiscal deficit, but the economy remains below potential, external debts are rising due to the falling currency, and capital flows remain anaemic.

The Czech Republic remains somewhere in between, with more moderate levels of foreign capital investment since the crisis, but with output levels still below potential and current account and budget deficits.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla