Bloomberg News

Emerging Europe Must Repair Budgets, Cut Bad Loans, IMF Says

October 05, 2011

Oct. 5 (Bloomberg) -- Governments in emerging European nations should increase fiscal discipline and help banks reduce bad loans to better cope with the euro region’s sovereign-debt crisis, the International Monetary Fund said.

The IMF predicts the region will grow 4.4 percent this year and 3.4 percent in 2012 as “the global slowdown makes itself felt,” the Washington-based lender said today in its Regional Economic Outlook for Europe.

Emerging Europe’s export-led recovery from the recession that followed Lehman Brothers Holdings Inc.’s 2008 collapse is being undermined by a slower U.S. economy and Europe’s worsening debt crisis. It depends on sales of goods to the euro region to drive growth, while three-quarters of its banking industry is controlled by western European lenders.

“The region is now caught in the downward trend of advanced countries, and the euro-area turbulence creates significant risks,” the IMF wrote. “Policymakers will need to make headway with addressing the legacies of the 2008-09 crisis, which include large fiscal deficits and high non-performing loan ratios.”

The region needed more than $100 billion in emergency loans in 2008 and 2009, with the IMF providing about $65 billion of bailouts to countries including Hungary, Latvia, Ukraine, Romania and Serbia.

‘Dire Repercussions’

The fund’s definition of emerging Europe includes Albania, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Kosovo, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Russia, Serbia, Turkey, and Ukraine. The European Union’s 10 eastern nations will expand 2.9 percent this year and 2.8 percent in 2012, the IMF forecasts.

Downside risks to the projections “are significant,” the IMF said. Should the euro area’s debt crisis escalate, “the repercussions for emerging Europe would be dire,” with a new credit crunch the most likely outcome, it said.

Governments should rein in spending and propose fiscal limits in legislation, the IMF said.

“Fiscal rules can help ensure” budget overruns are “not repeated in future upswings,” it wrote. “Fiscal rules can enhance the credibility of consolidation plans and entrench fiscal discipline.”

The region’s fiscal deficit is projected to decline to less than 2 percent of gross domestic product in 2011 and 2012 from 4.5 percent in 2010 and 6.2 percent in 2009 with “large differences across countries,” the IMF said.

This year, budget deficits exceed 4 percent of GDP in Croatia, Kosovo, Latvia, Lithuania, Poland, Romania, and Serbia, while public debt tops 50 percent of GDP in Albania, Hungary, and Poland, the IMF said. Still, there are “rapid improvements” in fiscal balances in Poland, Romania, Ukraine, and the Baltic countries, it added.

Non-Performing Loans

Governments in the region must seek to reduce bad debt in the private sector as “high levels of unresolved” delinquent loans “are likely to hold back economic recovery and structural change,” the IMF said.

The financial crisis left loan portfolios impaired after credit dried up and currency declines made it trickier for borrowers to repay foreign-currency loans.

In Latvia, Lithuania, Montenegro, Serbia, and Ukraine, non- performing loans exceed 15 percent of total outstanding credit, according to the IMF.

--Editors: Andrew Langley, Alan Crosby

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net;

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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