(Updates with Lagarde comments from second paragraph.)
Nov. 7 (Bloomberg) -- Eastern Europe may face a credit squeeze as western European banks mired in the euro area debt crisis withdraw liquidity from the region, said International Monetary Fund Managing Director Christine Lagarde.
“Big fault lines” remain in the former communist bloc’s economies, including a high share of external debt and loans in foreign currencies, both funded by western banks, Lagarde said today in speech at Moscow’s State University of the Ministry of Finance following a meeting President Dmitry Medvedev.
“This time around, Western parent banks, which have been instrumental in keeping those economies afloat, would no longer necessarily be here to sustain growth and the health of those countries,” she said. “The issue of availability of liquidity may very well come back as we see some of those Western banks withdraw, reduce their activities, reduce their exposure,” she added, diverging from the prepared text of the speech released by the IMF.
Lenders that bankrolled eastern Europe’s boom before the 2008 credit crunch are being squeezed by deteriorating loan quality and slowing economic growth. The region was the world’s worst-hit in the aftermath of the collapse of Lehman Brothers Holdings Inc. three years ago and may face the threat of another sharp slowdown as the euro area’s troubles spread.
With about three-quarters of eastern Europe’s banking industry owned by western lenders such as UniCredit SpA, Erste Group Bank AG and Societe Generale SA, regulatory pressure on them to raise capital ratios has triggered concerns that they give less support to local units.
--Editors: Paul Abelsky, Balazs Penz
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