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Analysts warn of risk as East Euro banks exposed to property price collapses

The International Monetary Fund and leading European analysts are warning that some of these countries could follow Iceland into virtual national bankruptcy.

The IMF has identified Estonia, Latvia and Lithuania as particularly at risk and it has been asked by Hungary to provide possible technical and financial support.

Dominique Strauss-Kahn, managing director of the IMF that some banks in Eastern Europe had become increasingly exposed to struggling property markets, having raised funds on international money markets, as did the ill-fated Icelandic banks.

These banks may be forced to reduce credit and the risk of such a scenario has risen, for instance, in the Baltic States, where house prices and credit growth have fallen, Mr Strauss-Kahn said.

Unlike Iceland, Estonia, Latvia and Lithuania are full members of the European Union, but are not currently part of the European rescue plan. Argentina, Ukraine and Kazakhstan are also increasingly mentioned as especially vulnerable. The IMF is the last port of call for countries whose financial systems have collapsed.

'Eastern Europe is still in something of an awkward position,' said Jon Levy, an analyst at Eurasia Group. 'The region's banking sector is dominated by eurozone banks, so any policy responses that bolster eurozone banks are positive.

'However, Eastern European countries are still dependent on the policy decisions of other countries to a much more significant degree than in the eurozone. They have limited capacity to influence which of the banks important to their markets are supported, and on what terms,' he added.

There is concern that the rest of Europe is not doing enough. 'Even though the new initiatives are undoubtedly providing some relief for Western European markets, the same cannot really be said for the Central and Eastern European markets, which continue to look very fragile,' said Lars Christensen, chief analyst at Denmark's Danske Bank.

He agrees with the IMF that there is a particular risk in the Baltic countries – Latvia, Lithuania and Estonia – but also Romania, Bulgaria, Ukraine and Hungary.

He is also getting more and more concerned about contagion to the relatively healthier economies in the region such as Poland and the Czech Republic.

'It seems that the markets are beginning to fear the CEE being left out of the rescue efforts directed at the European financial sector and markets,' he added.

There is also a fear that a banking crisis in former USSR countries could prompt Russia to intervene. In the Ukraine the banking system has begun to break down after years of torrid credit growth. Ukraine's government seized Prominvestbank, suspended payments to creditors and closed the Kiev stock market, which has fallen 73% this year.