Bloomberg News

East Europe Again at Risk of Euro Fallout, Development Bank Says

May 18, 2012

Economies in Eastern Europe and Central Asia are at risk from a deepening debt crisis in the euro area and rising energy prices, the European Bank for Reconstruction and Development said.

Economic growth in the 29 countries in which the London- based EBRD invests will be 3.2 percent this year, slowing from 5 percent in 2011, the bank predicted today in an e-mailed report. The region will expand 3.7 percent in 2013, according to its forecast.

Eastern Europe faces renewed contagion from the euro crisis as uncertainty over Greece’s future as a member of the currency union endangers credit flows and export markets, the EBRD has warned. Under its baseline scenario, it assumes the crisis will be contained, with a mild recession in the euro region.

“The euro-area crisis will continue to negatively impact those economies in the transition region that are the most intertwined with those of the euro zone,” the bank said. “A further worsening of the euro-zone crisis or an oil-supply shock are both possible and pose significant downside risks.”

Eastern Europe relies on financing from western lenders such as UniCredit SpA and Erste Group Bank AG, which own three- quarters of the region’s banking industry. The banks are cutting funding to their eastern units as stricter regulatory requirements force them to sell assets and bolster capital.

“As European parent banks continue to deleverage, subsidiaries in the transition countries will see reduced cross- border funding and therefore extend less credit,” the EBRD said. “These bank-related capital outflows are expected to continue in the coming months.”

Foreign banks’ exposure to emerging Europe fell by less than 3 percent in the last quarter of 2011, about half the drop recorded in the previous three months, the EBRD said, citing data from the Bank for International Settlements. In central Europe and the three Baltic nations, cross-border bank claims dropped by about 5 percent in both the third and fourth quarters, according to the report.

The EBRD, owned by 63 countries and two intergovernmental institutions, was created in 1991 to help transform the economies of former communist countries.

To contact the reporter on this story: Agnes Lovasz in Astana at alovasz@bloomberg.net

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


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