Most likely to be crunched

The US subprime meltdown is rippling throughout all corners of the world. Standard & Poor’s says that, among emerging markets, Latvia and Iceland are the most vulnerable to serious problems from this. Marketplace correspondent Stephen Beard explains the link.

Stephen, why Latvia and Iceland?

They are both very small economies, I mean Iceland there’s only 300,000 people living there, and both have had a raging credit and housing boom in recent years and therefore they’ve both been living in a credit bubble. As that credit is withdrawn, both will suffer.

Well, what might happen to them?

In the case of Latvia, S&P feel that it’s possible that it may have to devalue its currency, the lat. The Icelandic, which has had the decade-long boom fueled by foreign takeovers, could actually be tipped into recession. The Icelandic currency, the krona, has been involved in this huge wave of speculation with people borrowing in currencies like the Swiss franc and then pouring it into the Icelandic krona. If that whole trade goes into reverse, the Icelandic authorities will have to push up their interest rates. And since Icelandic interest rates are 13.3% at the moment, clearly much higher interest rates could cause huge pain.

Now what does S&P say about the other emerging markets in terms of which ones might withstand this better?

Well S&P. says the Russia, Egypt, Ukraine and the Czech Republic probably are the emerging markets which have the least to fear. They are the least exposed to this speculative bubble. On the other hand Bulgaria, Turkey and Romania do look pretty vulnerable too. (marketplace.org)