* EBRD ups central and eastern Europe 2010 GDP estimate
* 2010 growth seen slower for Romania, Bulgaria, others
* IMF says Spain, Portugal austerity won't hurt EU demand
* EBRD spearheads local capital markets development
By Boris Groendahl and Michael Winfrey
ZAGREB, May 15 (Reuters) - 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 TABLE
At 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 <RIBH.VI>,
the No.2 lender in the region, at the Zagreb meeting.
But he and his peers Andreas Treichl of Erste Group Bank
<ERST.VI> and Federico Ghizzoni of UniCredit <CRDI.MI> 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.
For a table of the EBRD's GDP forecasts, please click on:
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(Additional reporting by Zoran Radosevljevic, Gordana
Filipovic and Mike Winfrey; writing by Sebastian Tong; Editing
by Ruth Pitchford)
