Thomas Mirow, president of the European Bank for Reconstruction and Development, Thomas Mirow delivers a speech at the beginning of the Investment Forum meeting in Zagreb on May 13, 2010. AFP photo
The Greek debt crisis that is threatening to break up the euro zone may spill over to Eastern Europe and spoil the region’s fragile recovery, the European Bank for Reconstruction and Development, or EBRD, said.
The London-based EBRD, a development bank that helps former Warsaw Pact nations in eastern Europe and central Asia transform their economies, raised its 2010 economic growth forecast for the 30 countries it invests in to 3.7 percent on average from 3.3 percent predicted in January. Still, it warned that the struggle to contain a debt crisis in western Europe may stall the region’s growth, especially in the Balkan peninsula.
“We have the Greek crisis and it poses a risk in particular to southeastern Europe,” said EBRD Chief Economist Erik Berglof on Saturday in Zagreb, where the bank’s shareholders held their annual meeting. “But there is a broader risk for the region. Clearly this is something we are very concerned about.”
The former Warsaw Pact countries in Europe and former Soviet central Asia are recovering from the deepest recession since switching to free-market policies two decades ago. Challenges for the 30 economies the EBRD invests in include adjusting to a slower pace of growth as the European Union, the largest export market for most of the region, grapples with mounting fiscal problems.
The euro fell 3.1 percent to $1.2358 last week, from $1.2755 on May 7. It traded as low as $1.2354 on Friday, the weakest since October 2008.
German Chancellor Angela Merkel said Europe is in a “very, very serious situation” despite a rescue package for the region’s most indebted nations. Meantime, El Pais newspaper reported that French President Nicolas Sarkozy threatened to withdraw his country from the euro.
Defending the eurozone:
EU Monetary Affairs Commissioner Olli Rehn told participants at the Zagreb conference that “it is important that markets read our package and see that we are serious about our defense of the euro area.”
The euro region’s tensions may affect eastern Europe through “a disruption of capital markets” as well as “a decrease in import demand from countries like Germany or France
to which most countries are important exporters,” EBRD President Thomas Mirow said. “There are potential risks that can be channeled through the subsidiaries of Greek banks. Up until now we haven’t seen this materializing. We have to watch and encourage policy makers to bear this risk in mind.”
The EBRD raised the forecast for Russia to 4.4 percent from 3.9 percent. It also revised higher outlooks for Turkey, Poland, Hungary, and Ukraine, while it lowered earlier expectations for Romania and Bulgaria. Even so, countries in the east need to monitor statements and actions by western European leaders.
“The outlook remains very uncertain because of a shift in risks from the domestic to the external,” said Berglof. “External risks have risen dramatically.”
Protracted rebound:
While the EBRD now expects most countries where it operates to recover, the rebound will be protracted, it said. Growth rates will remain below pre-crisis levels and former drivers of expansion, such as investment from abroad and consumer spending, will remain subdued. The region was growing at an average 5 percent a year before 2008.
The EBRD’s shareholders at their meeting also increased the bank’s resources for the next five years. They approved increasing the bank’s capital 50 percent to 30 billion euros ($37.2 billion) enabling it to invest about 52 billion euros until 2015, more than the bank’s combined investments since its 1991 inception.
It also announced a plan to limit foreign-currencies by Eastern Europe banks, after they brought some countries to verge of default during the global credit crisis.
The bank stepped up efforts to wean the region off foreign-currency financing and encourage banks to lend in local currency.
Underdeveloped financial markets, low saving rates and high local interest rates contributed to a surge in foreign currency loans during the boom years, the EBRD said.
East European banks and their parents in Austria, Italy, Germany and Sweden struggled to refinance foreign-currency mortgages, car and consumer loans.
The bank’s 63 shareholders then pledged to support an EBRD program focused on helping companies as well as enabling countries with excessive reliance on raw-material exports, such as Russia, or few manufactured goods, such as central Europe, to diversify production and become more competitive.
East Europe faces euro risk from the West
Thomas Mirow, president of the European Bank for Reconstruction and Development, Thomas Mirow delivers a speech at the beginning of the Investment Forum meeting in Zagreb on May 13, 2010. AFP photo
The Greek debt crisis that is threatening to break up the euro zone may spill over to Eastern Europe and spoil the region’s fragile recovery, the European Bank for Reconstruction and Development, or EBRD, said.
The London-based EBRD, a development bank that helps former Warsaw Pact nations in eastern Europe and central Asia transform their economies, raised its 2010 economic growth forecast for the 30 countries it invests in to 3.7 percent on average from 3.3 percent predicted in January. Still, it warned that the struggle to contain a debt crisis in western Europe may stall the region’s growth, especially in the Balkan peninsula.
“We have the Greek crisis and it poses a risk in particular to southeastern Europe,” said EBRD Chief Economist Erik Berglof on Saturday in Zagreb, where the bank’s shareholders held their annual meeting. “But there is a broader risk for the region. Clearly this is something we are very concerned about.”
The former Warsaw Pact countries in Europe and former Soviet central Asia are recovering from the deepest recession since switching to free-market policies two decades ago. Challenges for the 30 economies the EBRD invests in include adjusting to a slower pace of growth as the European Union, the largest export market for most of the region, grapples with mounting fiscal problems.
The euro fell 3.1 percent to $1.2358 last week, from $1.2755 on May 7. It traded as low as $1.2354 on Friday, the weakest since October 2008.
German Chancellor Angela Merkel said Europe is in a “very, very serious situation” despite a rescue package for the region’s most indebted nations. Meantime, El Pais newspaper reported that French President Nicolas Sarkozy threatened to withdraw his country from the euro.
Defending the eurozone:
EU Monetary Affairs Commissioner Olli Rehn told participants at the Zagreb conference that “it is important that markets read our package and see that we are serious about our defense of the euro area.”
The euro region’s tensions may affect eastern Europe through “a disruption of capital markets” as well as “a decrease in import demand from countries like Germany or France
to which most countries are important exporters,” EBRD President Thomas Mirow said. “There are potential risks that can be channeled through the subsidiaries of Greek banks. Up until now we haven’t seen this materializing. We have to watch and encourage policy makers to bear this risk in mind.”
The EBRD raised the forecast for Russia to 4.4 percent from 3.9 percent. It also revised higher outlooks for Turkey, Poland, Hungary, and Ukraine, while it lowered earlier expectations for Romania and Bulgaria. Even so, countries in the east need to monitor statements and actions by western European leaders.
“The outlook remains very uncertain because of a shift in risks from the domestic to the external,” said Berglof. “External risks have risen dramatically.”
Protracted rebound:
While the EBRD now expects most countries where it operates to recover, the rebound will be protracted, it said. Growth rates will remain below pre-crisis levels and former drivers of expansion, such as investment from abroad and consumer spending, will remain subdued. The region was growing at an average 5 percent a year before 2008.
The EBRD’s shareholders at their meeting also increased the bank’s resources for the next five years. They approved increasing the bank’s capital 50 percent to 30 billion euros ($37.2 billion) enabling it to invest about 52 billion euros until 2015, more than the bank’s combined investments since its 1991 inception.
It also announced a plan to limit foreign-currencies by Eastern Europe banks, after they brought some countries to verge of default during the global credit crisis.
The bank stepped up efforts to wean the region off foreign-currency financing and encourage banks to lend in local currency.
Underdeveloped financial markets, low saving rates and high local interest rates contributed to a surge in foreign currency loans during the boom years, the EBRD said.
East European banks and their parents in Austria, Italy, Germany and Sweden struggled to refinance foreign-currency mortgages, car and consumer loans.
The bank’s 63 shareholders then pledged to support an EBRD program focused on helping companies as well as enabling countries with excessive reliance on raw-material exports, such as Russia, or few manufactured goods, such as central Europe, to diversify production and become more competitive.
