For more from the Reuters Central European Investment
Summit, click on:
http://www.reuters.com/summit/CentralEuropeanInvestment09?pid=500
(Updates with background, details)
By Sebastian Tong
LONDON, Sept 29 (Reuters) - Eastern Europe's banks have
underestimated the value of bad loans they hold in the aftermath
of the financial crisis and their impact will be felt across the
region next year, the chief economist at the European Bank for
Reconstruction and Development (EBRD) said on Tuesday.
Warning that the region's banking system remained fragile,
Erik Berglof told the Reuters Central European Investment Summit
the push for Western lenders to sell assets as part of
conditions for obtaining state aid could also hurt the region.
He said Russia was one economy where bad debt levels were
still "significantly worse" than officially reported.
"We know that non-performing loans are increasing. They
haven't been increasing at the pace we were worried about (at
the start) but that is because in some countries the way
official statistics report them is not satisfactory," Berglof,
who is also special adviser to the EBRD President, said.
He said the European Commission's demand that Western banks
get rid of non-core assets could prompt these lenders to sell
off Eastern and Central European subsidiaries and further
tighten credit to the region.
"They are asking for...the disposal of non-strategic assets.
But some of these assets are strategic for our region. Most of
these subsidiaries are systemic for our region," Berglof said.
Central and eastern Europe has been hard hit by the global
financial crisis, and is trying to recover from troubles with
currencies, high foreign debt exposure and a euro zone slowdown.
Persistently weak credit growth and uncertainty over the
banking system make the pace of economic recovery uneven and
could hold the region back in the coming years, Berglof said.
He reiterated that the development bank was likely to revise
downwards its forecast of a 5.2 percent contraction for the
region this year and raise its 2010 forecast of 1.4 percent in
its annual transition report expected in the coming weeks.
"It's safe to say that compared to our forecast in May, the
forecast will be lower this year because of information from Q2
numbers and what we know from Q3," he said.
FRAGILE
Reduced capital flows and weakened banking systems will see
the region emerge from the crisis to grow at a slower, albeit
more sustainable, pace than the boom years, Berglof said.
"For many countries we see continued deterioration. The
diversity within the region is important to keep in mind...Even
for countries that have turned the corner we look forward to
slow and fragile growth," he said.
Berglof said the fiscal sacrifices demanded across the
region were "extraordinary" and "not easy" for any government to
push through.
"You're asking for the civil servant to take a 40 percent
pay cut, for countries to close down hospitals and delay school
entry age," he said.
Berglof, who is also Special Adviser to the EBRD President,
praised Hungary, which he said was beginning to reap the rewards
of moving early to deal with its fiscal problems.
"Hungary has managed to take onboard a substantial fiscal
adjustment programme. They are now being rewarded for that and
have been able to lower interest rates," he said.
A Hungarian central banker told Reuters on Tuesday that the
country was ready to come off its aid package from the
International Monetary Fund (IMF) and signalled further gradual
easing of interest rates. []
Berglof said he was particularly concerned about Ukraine,
where divisions among government leaders were allowing the
fiscal situation to deteriorate.
He said curbs on foreign currency lending and raising of
bank capital requirements by the central bank were also
hampering real demand. "I'm quite unhappy with how the Ukrainian
central bank is dealing with problems in its banking sector."
Set up in 1991 to help former communist states adjust to
free markets, the EBRD is asking its 60-odd country shareholders
for an extra 10 billion euros so it can expand lending in the
region. []
(Reporting by Sebastian Tong; editing by Patrick Graham)
