Debt Crisis to Cut Growth in Eastern Europe, Report Says

The European Bank for Reconstruction and Development, which lends to businesses and governments in the former Soviet bloc and is underwritten by Europe and the United States, cut its growth estimate for Central Europe and the Baltics to 1.7 percent for 2012.

In July, the bank predicted an expansion of 3.4 percent for the eight countries in the region, which stretches from Croatia to Estonia.

Southeastern Europe, which includes Romania, Bulgaria, Serbia and four other countries, will grow 1.6 percent next year, the bank said, down from a forecast of 3.7 percent in July. Those countries are suffering from their ties to Greece, the euro zone country with the gravest debt and economic problems.

Even the revised predictions may be optimistic, because they are based on the assumption that Western Europe will slow to a standstill but avoid recession, and that policy makers will manage to contain the debt crisis. In recent weeks many economists have started predicting that Europe is headed for recession. Whether European leaders manage to tame the debt crisis is an open question.

“For next year there is an exceptional uncertainty about the course of developments in the euro zone, and the ramifications for Central Europe,” the European Bank for Reconstruction and Development wrote in its report on prospects for the region, which was released Tuesday.

Eastern Europe has been hit harder by the financial crisis and recession that began in 2008 than any other part of the world, with output plunging more than 5 percent in many countries. The bank’s report highlighted the region’s continued vulnerability to its richer neighbors.

Countries like Hungary and Slovakia depend heavily on the euro zone for trade and capital. In addition, most banks are foreign-owned, and there is a risk that West European institutions could starve their eastern subsidiaries of credit.

In 2009, only an emergency accord among lenders, known as the Vienna Initiative, prevented wholesale capital flight and the collapse of local banks.

While the region is less susceptible to banking woes than during the previous crisis, the bank said, the number of bad loans is still high and many consumers and businesses continue to have loans denominated in euros or Swiss francs. Foreign currency loans can become ruinously expensive for borrowers when local currencies plunge in value, as happened in 2009.

The European Bank for Reconstruction and Development did not forecast that any of the countries in which it is active would fall into recession, but said that even star performers like Poland would experience markedly slower growth. The bank cut its growth forecast for Poland to 2.2 percent for 2012. In July, the bank had forecast a 3.5 percent expansion for Poland next year.

The development bank, which is underwritten by 61 countries, also predicted a sharp slowdown in Turkey, to 2.5 percent in 2012 from 7.5 percent growth this year. The Turkish economy is suffering from excess borrowing and has become overheated, the bank said.

Growth in Russia will accelerate slightly next year to 4.2 percent, from 4 percent in 2011, the bank said, because of strong commodity prices. But it cautioned that the outlook for Russia was vulnerable to volatile oil prices.

If euro zone leaders tame the sovereign debt crisis, the development bank said its predictions could prove overly pessimistic. But it also warned that a failure to control the crisis could have dire effects on Eastern Europe. “The potential for worsening of the current situation in the euro zone beyond the baseline scenario poses significant risks even to the lowered outlook,” the bank said.

Article source: http://www.nytimes.com/2011/10/18/business/global/euro-crisis-weighing-on-east-european-growth.html?partner=rss&emc=rss