Monday, November 29, 1999

East Europe 2010 GDP outlook raised but EU impact seen

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Development lender EBRD raised its 2010 economic outlook for eastern and central Europe on Saturday but cut growth estimates for some countries, warning of a risk from fallout from Greece's sovereign debt crisis.Emerging from its steepest recession since the collapse of communism in the region two decades ago, central Europe is now expected to grow 3.7 percent this year, up from the 3.3 percent forecast in January.The European Bank for Reconstruction and Development (EBRD) said the pace of eastern Europe's recovery was becoming more uncertain thanks to the debt crisis in the continent's more developed western wing."It's still a slow recovery in the region due to its dependence on the European Union as a market for exports, a source of direct investment and capital flows," said Erik Berglof, the EBRD's Chief Economist. "The follow-on effects from the drop in output and the continued increase in unemployment are also weighing on domestic demand."Some economists fear austerity measures in the euro zone's periphery after the bloc agreed a 750 billion euro ($950 billion) crisis package will hit EU demand and in turn hurt exports and growth in emerging Europe.But a senior International Monetary Fund (IMF) official at the EBRD's annual meeting played down those fears."We don't think the measures announced recently by countries like Spain, Portugal and possibly some others, would have a major negative demand impact," said Marek Belka, director of the IMF's European department."If they have a positive impact on the market, then (bond) spreads will fall and, on balance, this may have a slightly positive, if not neutral impact on growth prospects."Italy, Spain and Portugal agreed to cut their public deficits this week to fend off growing investor fears over the sustainability of their spiralling debt.The EBRD, which was set up at the end of the Cold War to help former communist economies adjust to free markets, expects the pace of recovery in Russia, Turkey, Poland, Hungary, and Ukraine to be faster than it forecast in January.But growth forecasts in Romania and Bulgaria were among those revised down, reflecting a growing disparity in economic performance in the 29 countries where the EBRD operates.MONEY ON TABLEAt its annual meeting, the EBRD also moved to address eastern Europe's dependence on foreign currency borrowing, a "key vulnerability" that left the region teetering on the edge of a financial abyss last year.The bank said it would invest to develop the region's capital markets to help provide banks with long-term funding in local currencies and to encourage domestic savings."The crisis laid bare the region's twin vulnerabilities of excessive reliance on foreign capital and excessive use of foreign exchange borrowing," said Berglof."As the recovery takes hold in the region, it is important to urgently address these vulnerabilities," he said.The enthusiasm of consumers and companies in the former Communist bloc for borrowing in hard currencies for everything from plasma screens to apartments left it reliant on foreign financing -- a key cause of financial instability at the height of the global financial crisis.Credit growth in the region is still fledgling, but there is little doubt that retail demand for loans in euros and Swiss francs -- which carry lower interest than loans in local currencies -- will return as economies recover.Despite broad agreement that foreign currency lending -- also seen as a major factor in Asian and Latin American financial crises -- should be contained to make the region's growth more sustainable, practical measures remain elusive."We all believe we should restrict FX lending," said Herbert Stepic, CEO of Austrian bank Raiffeisen International, the No.2 lender in the region, at the Zagreb meeting.But he and his peers Andreas Treichl of Erste Group Bank and Federico Ghizzoni of UniCredit said that ending FX lending was not possible without creating access to reasonably priced, long-term funding in local currencies."We suggest to develop gradually a local capital market," Ghizzoni told Reuters Insider TV in Zagreb. "It cannot be done in a few weeks or a few months. It will take some time."For its part, the EBRD will over the next months choose countries big enough to sustain local capital markets and use their local currencies in its own lending and borrowing, working with governments to help build a full range of local capital-raising and investment options.(Additional reporting by Zoran Radosevljevic, Gordana Filipovic and Mike Winfrey; writing by Sebastian Tong; Editing by Ruth Pitchford)

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