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Emerging Europe Re-Emerging

Emerging Europe investing is staging a comeback.

In the past couple of months, stock markets in the region have posted big rallies. The index for Lithuania has shot up 58 percent since June 30, while the indexes for its Baltic neighbors Estonia and Latvia have climbed 33 percent and 27 percent, respectively.

In Central Europe, the key stock indexes for the Czech Republic and Hungary are both up 26 percent in the third quarter through Friday, and Poland’s index has gained 20 percent.

All of these stock markets suffered mightily in the global credit crisis as their overheated economies stalled, their currencies dropped, and the cost of loans denominated in dollars and euros skyrocketed.

Now it appears that intervention by the International Monetary Fund, combined with a growing belief that the worst of the financial woes and global recession are behind us, may have mitigated the region’s risk profile and lured investors back.

Not that all of the news coming out of the region is good—the IMF estimates that Latvia’s economy will shrink 18 percent in 2009 and another 4 percent in 2010. The IMF has agreed to provide $2.4 billion in loans to Latvia, one of the nations hit hardest by the global financial crisis and subsequent recession. Lithuania is also receiving external funding after seeing its GDP contract 12.3 percent during the second quarter.

Russia, the largest market in Emerging Europe, is up more than 14 percent since June 30, while No. 2 Turkey has risen nearly 29 percent.

The regional upswing has also benefited stock indexes in Austria (+22 percent) and Sweden (+16 percent), which both have strong banking ties to Emerging Europe.

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