* Double-digit growth may not return in emerging Europe
* Premature optimism about recovery dangerous
* Bank balance sheets likely to be hit again
(Updates with Latvia, Ukraine and banks)
By Sylvia Westall
VIENNA, July 24 (Reuters) - Emerging Europe may not return
to the high growth rates and record investment levels it enjoyed
before the crisis, the head of the European Bank for
Reconstruction and Development (EBRD) said on Friday.
EBRD President Thomas Mirow also warned against
underestimating the crisis as more pain was yet to come.
"The crisis started in the financial sector, it then
affected the real economy. The ensuing feedback to the financial
sector will no doubt hit bank balance sheets again," Mirow said
in remarks prepared for a lecture in Vienna.
The development bank, set up in 1991 to foster the
ex-Communist bloc's transition to a market economy, recently
boosted its investment target for 2009 by 30 percent in response
to the crisis. Mirow said he expected a further boost shortly.
It has agreed to take a 25 percent stake in Latvia's
nationalised bank Parex and sanctioned a 430 million-euro
($611.6 million) loan to Italy's Unicredit which has a big
presence in eastern Europe.
"There can be no secret that Latvia is a cause of concern,"
Mirow told a news conference, adding that the EBRD would back
IMF and EU efforts to help the country, which has been battling
to secure aid and is tackling problems over budget funding.
Talking on the region in general, Mirow said a steep rise in
non-performing loans and possible corporate defaults were a
cause for concern, along with fiscal reform challenges, the need
for well-functioning money markets and the problem of regional
foreign-exchange exposure.
He said the region should now target sustainable and lasting
growth in the aftermath of the crisis. "The depth and breadth of
the crisis means that we may not see a return to double-digit
growth rates, record levels of investment and readily available
finance," he said.
SHRINKING ECONOMIES
Central and Eastern Europe's economies are set to shrink by
5 percent this year, and the former Soviet Union by 5.8 percent,
as exports to western Europe sink and capital inflows dry up,
according to the IMF.
The EBRD expects Romania, Russia, Turkey and Ukraine to
suffer severe recessions, with output shrinking between 4-15
percent this year.
Mirow said Ukraine was in a "very serious situation" and
that Europe and the United States must watch it carefully
because of its size in the region.
He added however that the IMF's work there was positive step
and that he was pleased that a solution was being sought to
prevent a repeat of the winter gas crisis.
Local banks, bankrolled by their mostly western owners,
fuelled the region's economic boom between 2000 and 2008,
drawing in cash for countries like Austria.
"Although a systemic banking crisis has been avoided in the
region, adequate capitalisation of the banking system remains a
prime task," Mirow said. "It will be important to recapitalise
banks which have portfolio weaknesses because of the crisis but
are otherwise regarded as sound and stable."
Mirow said the EBRD was in close contact with Austrian and
other Western European banks "on further projects". He did not
mention any specific companies.
