Debt crisis threatens recovery

VILNIUS - Eastern Europe and central Asia are at risk from a deepening debt crisis in the euro area and a pickup in inflation stoked by a recovery in consumer demand, the European Bank for Reconstruction and Development said, reports Bloomberg. The EBRD raised its 2011 economic growth forecast for the 29 countries in which it invests to 4.6 percent from 4.2 percent predicted in January, the London-based bank said on May 20 in a report distributed at its annual meeting in Astana, Kazakhstan. It expects growth to slow to 4.4 percent next year.

As the recovery from the region’s worst recession in two decades takes a broader hold, consumer spending is beginning to spur growth in most East European nations, adding to inflation pressures caused by rising energy costs, the EBRD said. The eurozone remains marred by a debt crisis, which may stall regional growth and pose a threat to local banks.
“Better growth prospects are associated with stronger inflationary pressures as high global commodity prices combine with a recovery in domestic demand,” the bank said in the report. “Concerns are growing about the possible fallout from sovereign debt problems in some euro zone countries.”

Contagion risks from the euro region have increased after Portugal earlier this year joined Greece and Ireland in obtaining a bailout, and Europe’s leaders are working on a new plan to ease Greece’s fiscal troubles that may include extending bond payments.

If the euro crisis remains unresolved, it may halt investment and capital inflows to Eastern Europe, prompting Western banks, owners of more than 70 percent of regional lenders, to scale back loans, according to the EBRD.
As global rate setters are growing more concerned about inflation threats, the region remains vulnerable to a slowdown in the world economy that might follow monetary policy tightening by the European Central Bank, which began raising rates in April, and as the U.S. Federal Reserve prepares to roll back its asset purchases, the bank said.

The EBRD, owned by 61 countries and two intergovernmental institutions, was created in 1991 to invest in former communist countries to help them transform their economies.