By Agnes Lovasz – Oct 17, 2011 11:01 PM GMT+0100
Economic growth in eastern Europe is slowing “substantially” as a “protracted” euro-area debt crisis infects the region, the European Bank for Reconstruction and Development said.
The EBRD cut its 2012 growth forecast for the 29 east European and central Asian nations in which it invests to 3.2 percent from 4.4 percent in July, according to a report released today. Growth will slow from this year’s 4.5 percent, the EBRD said, revising its previous estimate of 4.8 percent.
While three months ago the EBRD assumed “a relatively benign external environment” with contained spillover risks from the euro area, it now says the escalating crisis has infected eastern Europe through intertwined trade and banking links. The development bank expects drawn-out repercussions from the euro region’s troubles, which will ultimately be contained, under its main scenario.
“This crisis has clearly deepened,” EBRD chief economist Erik Berglof said in an Oct. 14 phone interview from London. “We assume there will be a resolution, but even if we establish the right measures, it will take some time to implement them. No matter what way you resolve this, there will be some impact on credit to the region.”
European officials outlined the initiatives they’re considering at a meeting of finance ministers and central bankers from the Group of 20 economies last weekend. The G-20 finance chiefs urged the region’s leaders to deal “decisively” with the turmoil when they meet for emergency talks on Oct. 23 in Brussels.
Eastern Europe’s banks may face a new credit crunch should western parent banks suffering losses on Greek bonds cut financing to units in the east. Western lenders, including as Unicredit SpA (UCG), Erste Group Bank AG (EBS) and Societe Generale (GLE) SA, own about three-quarters of the region’s banking industry.
To avoid a repeat of the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc., the EBRD called on European leaders in both the west and the east to come up with ways to mitigate the risks.
The London-based lender helped avert a region-wide crisis in 2008-2009 by leading efforts, known as the Vienna Initiative, to persuade western banks to roll over funding for their eastern units and inject fresh capital if needed.
“There is a risk that the ability of bank groups to pass on support to their subsidiaries in the transition region may be constrained by their national governments,” according to today’s report. “This could result in a substantial reversal of bank debt flows and a large contraction of credit in the region, with potentially severe consequences for output. Policy coordination that includes emerging Europe is needed perhaps even more than” in 2008-2009.
Lack of a resolution of the euro-region turmoil and a U.S. recession would pose additional risks to growth across the EBRD’s region, the bank said.
“The potential for worsening of the current situation in the euro zone beyond the baseline scenario poses significant risks even to the lowered outlook,” according to the report.
While all EBRD countries are forecast to avoid a contraction in gross domestic product, central and southeast European countries, which are “particularly vulnerable” to euro-region contagion, will see the deepest slowdown.
The EBRD revised its 2012 forecast in the central Europe and Baltic region to 1.7 percent, from the 3.4 percent seen in July. Growth in southeastern Europe will be 1.6 percent next year, more than 2 percentage points lower than the July prediction.
Expansion in Russia will remain “reasonably strong,” supported by government spending in the run-up to presidential elections in 2012, the EBRD said. Growth will quicken to 4.2 percent next year from 4 percent in 2011, it 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.