The cost of insuring the debt of the leading eastern European countries rose to record highs on Monday as concerns grew over their economic health.
Doubts over the ability of these economies to raise money in restricted credit markets are one of the biggest worries among investors.
The cost of insuring Russian debt against default rose to all-time highs of about 770 basis points, or €770,000 ($981,000), to insure €10m of debt annually over five years. This is about 100bp higher than at the start of the year.
Other big eastern European economies also saw credit default swap prices jump to record levels.
Poland’s CDSs rose to about 420bp, the Czech Republic’s to about 340bp, Hungary’s to about 580bp and Ukraine’s to about 4,000bp.
Although the currencies of these economies rose after the region’s central banks insisted that last week’s sell-off was overdone, bankers warned that the rally would be short lived.
Nick Chamie, head of emerging markets research at RBC Capital Markets, said: “We are in a real danger that the eastern European markets will come under greater stress over the coming months as more investors become aware just how serious the problems are.
“Most hedge funds have exited these markets, but many more real-money investors – the pension funds and asset managers – may also start pulling out as it becomes more apparent that the situation in these markets can only get worse.”
Bankers say a big problem is the need to refinance foreign currency debt taken on before the credit crisis that is due to be rolled over this year.
Russia has about $500bn in external debts due this year, while Poland, the Czech Republic, Hungary and Ukraine have a combined bill of about $120bn, according to ING Financial Markets.
Hungary and Ukraine have been forced to seek help from the International Monetary Fund to meet repayments, and analysts warn that other countries could be forced to turn to multilateral agencies too.
The problems in eastern Europe are hitting the western eurozone economies because many banks in these countries have large exposures to emerging neighbours.
Eurozone banks have liabilities of $1,500bn, about 90 per cent of total foreign bank exposure to the region.
Austria, which has the largest exposure to eastern Europe of the eurozone economies, saw its credit default swaps rise to record levels of about 250bp on Monday.
Austria’s banks have lent about 80 per cent of the country’s gross domestic product to eastern Europe. Italy and Sweden are also exposed.
Eurozone economies are less likely to face problems rolling over debt after Germany hinted last week that it was ready to protect single currency members should they have difficulties in refinancing bonds or loans.
