Risks remain despite second bailout

  • 2011-07-27
  • From wire reports

RIGA - Eastern Europe and central Asia are at “serious risk” from the 21-month-old euro-area debt crisis as leaders of the currency union prepared a second bailout for Greece last week, the European Bank for Reconstruction and Development said, reports Bloomberg.

Central Europe and the Baltic States would be most hit by soaring funding costs and a euro-region economic slowdown, according to the EBRD’s report, because of their “deep integration” with Western European markets. This region, which includes Poland, Hungary and Lithuania, will grow 3.5 percent this year and 3.4 percent in 2012, the EBRD predicted.
The EBRD raised its 2011 economic growth forecast for the 29 countries in which it invests to 4.8 percent from 4.6 percent predicted in May, while still expecting a slowdown to 4.4 percent next year, the bank said on July 22.

The prediction “assumes a relatively benign external environment in which risks from the euro zone are contained,” the London-based EBRD said in the e-mailed report. “An escalation of the eurozone crisis would pose serious risks to growth and recovery across the region.” An unresolved sovereign crisis would halt investment and capital inflows to Eastern Europe and losses booked by Western banks, owners of more than 70 percent of regional lenders, would prompt them to curb loans, the EBRD warned.

The outlook is also clouded by an economic slowdown in the U.S. and China, the world’s two largest economies, the bank said. The main contagion threat is that Western European banks, including Unicredit SpA (UCG), Erste Group Bank AG (EBS) and Societe Generale (GLE) SA, which began to increase loans to businesses and consumers this year, will rein in that financing, derailing the recovery, according to the EBRD. Should the euro crisis worsen, “some of these banks could require financial support and might struggle to keep up their lending to the local economies,” the EBRD said.

“Credit to the private sector is still weak and continues to provide only limited support to economic expansion,” noted the report. The pace of credit growth ranged from gains of 44 percent in Turkey and 18 percent in Russia, to 3 percent in Romania. Credit was still shrinking in the Baltic States, where banks keep cleaning up balance sheets and writing off non-performing loans, while it stagnated in Hungary as a result of weak domestic demand and high bank levies, the EBRD said.
Southeast Europe’s recovery remains the weakest, being the region most directly at risk by the financial instability in the euro region, according to the EBRD report.

While Russia and other countries of the former Soviet Union are the least exposed to risks from the euro region, energy producers would be hit by a stagnating euro area through a dent in demand for commodities, the EBRD said.
The bank, owned by 61 countries and two intergovernmental institutions, was created in 1991 to invest in former communist countries to help them transform their economies.