Squeeze on CEE at odds with fundamentals

The double burden comprising the global liquidity crisis and fears about a painful slowdown in the eurozone have negatively affected risk premiums in Central and Eastern Europe. After the peak in mid-September CEE credit spreads again rose sharply in the last couple of weeks and reached new all-time highs, mainly due to the liquidity problems of European financial institutions (Fortis, Dexia, Hypo Real Estate, Icelandic banks). The cost of insuring sovereign debt has soared, pricing in an increasing risk of default, which reflects the lack of confidence among investors. They are sending the...