"Corporates from western Europe are exposed to CEE currencies through exports to these countries as well as through local production. As a consequence, we see regular hedging from our corporate clients, most of the time through forex forwards," says Frédéric Jeanperrin, London-based head of forex and interest rate derivatives corporate sales for Europe at Société Générale.
"However, over the past few months and due to the tensions on these currencies, we have experienced a substantial increase in hedging volumes. Some corporates have also lengthened the maturity of their hedges," he adds.
Deteriorating economic conditions in emerging Europe have become a growing concern, not least for western Europe, which has an exposure of around $1.5 trillion to the region. Indeed, the rapid depreciation of CEE currencies, coupled with the large chunk of foreign-currency debt in the region, has led analysts to draw parallels with the Asian crisis of 1997, when a mismatch between local currency assets and dollar liabilities led to a spate of corporate bankruptcies, high levels of non-performing loans on bank balance sheets and a tightening of credit supply.
For the 16 CEE countries, forex loan books have already dropped in value by an average of 25-30%, according to Deutsche Bank. Consequently, the external financing gap in CEE countries has widened sharply over the past few months. SG analysts estimate this shortfall could reach $180 billion in 2009.
"We're starting to see some distress in CEE loan books. At this stage it is probably still bearable as it can be absorbed in household and corporate debt service buffers," says one London-based chief economist for Europe, the Middle East and Africa at a European bank.
"But if currencies move an additional 20-30%, you might see a spike in non-payment behaviour, similar to what we saw in Asia 10 years ago. We're at a tipping point now."