* EBRD says external risks main E.Europe problem
* Countries need to act to avoid imbalances returning
* Moscow says needs to shift trade focus away from Europe
* Kazakhstan, Montenegro eyeing eurobond issues
* Croatia says still wants to join the euro
(Adds Russia shifting trade focus)
By Sebastian Tong and Boris Groendahl
ZAGREB, May 14 (Reuters) - The euro zone crisis will hit
exports and undermine recovery in central and Eastern Europe,
officials said on Friday, a blow to the region that suffered the
worst recession of the global financial crisis.
The European Bank for Reconstruction and Development said
looming fiscal cuts in western Europe would weaken demand for
eastern goods and it would cut its growth forecasts for the
region stretching from the Baltics to the Black Sea and east
into central Asia.
Following first quarter growth data that showed the euro
zone was climbing out of last year's downturn more slowly than
expected, ripples began to appear among the economies that
depend heavily on the 16-member currency union.
Russia said it needed to urgently re-route exports from
Europe to other, faster-expanding markets, while the Czech
central bank said concerns over the bloc's fiscal shape and high
indebtedness had contributed to a surprise rate cut last week.
"Measures in western Europe that drag down demand -- fiscal
restraints for example -- will have an impact on central and
eastern Europe as they depend so much on exports to the euro
zone," EBRD Chief Economist Erik Berglof told Reuters Insider
television on the sidelines of the bank's annual meeting.
"We were a bit more optimistic before but the outside risks
are clearly what we are worrying about now."
In January, the London-based development bank said the
region would grow 3.3 percent on average in 2010, recovering
ground after a downturn that saw Latvia's economy contract 18
percent and others shrink in the high single digits.
Poland, the Czech Republic, and several other countries are
expected to be among countries to grow this year.
But low western demand is expected to prolong pain for
others and the entire region is expected to be outpaced by
emerging markets in Latin America and Asia.
"Emerging market regions are recovering at different speeds,
and the EBRD region is lagging behind most others," EBRD
President Thomas Mirow told the bank's Governors in Zagreb.
AVOID IMBALANCES
Russian Economy Minister Elvira Nabiullina signalled Russia
should focus on faster growing markets such as Asia, which she
said would produce 30 percent of global GDP by 2013.
"The main part of our exports is oriented towards the
slow-growing European market. We risk being outside of the new
centres of growth," she said.
The EBRD, set up at the end of the Cold War to help former
communist economies adjust to free markets, said they needed to
work now to avoid future crises hitting as severely.
It urged countries in the former communist bloc to avoid a
return of the imbalances that plunged them into a crisis worse
and more drawn-out than in any other emerging market last year.
"We must prevent a return of the macroeconomic and financial
imbalances that explain the severe impact the crisis had on our
region and why it is now taking longer to recover," Mirow said.
"This means ... to avoid excessive current account deficits
and unsustainable credit booms."
A main driver of those imbalances was foreign currency
borrowing among consumers in euro zone candidates who had bet
their forints, zlotys and other currencies would gradually
appreciate before they swapped them for the single currency.
Hungarian central bank Vice Governor Julia Kiraly said that
model had proven risky and a change was in order.
"We should change our growth model," she said. "We should
rely mainly on internal savings. The main lesson is, don't
borrow heavily from international capital markets."
She did say, however, that better than expected first
quarter growth data could signal an upgrade to the bank's
forecast of a 0.2 percent contraction this year although it will
remain far below the 4 percent plus growth the International
Monetary Fund expects in Asia and Latin America.
EURO BONDS
Despite the euro zone's current woes, the common currency
has not lost its attractiveness for Croatia, which hopes to join
the European Union in 2012, and the euro sometime later.
"The fundamental reasons for Croatia to join the euro zone
as soon as possible are still there," central bank deputy
governor Boris Vujcic said. "The costs for joining the euro zone
are very small and benefits definitely prevail."
A crisis package approved at the weekend has also soothed
markets somewhat, encouraging Kazakhstan and Montenegro to dip
their toes back into the eurobond market in a sign that emerging
economy policymakers believe the threat of contagion is easing.
Kazakhstan's finance minister Bolat Zhamishev said his
country was planning to raise at least $500-750 million via a
eurobond in the second half of the year, the first in a decade
for the resource-rich central Asian country.
"We are not planning to issue a large eurobond. The minimum
volume that we're focusing on is $500-750 million," he said.
Other countries said they too could grow after steep
downturns. Despite the fears of contagion, Serbia's finance
minister said growth could double next year to 4 to 5 percent
and Macedonia's said there would be moderate growth of 2 percent
this year after a 0.7 decline in 2009.
Montenegro's finance minister also said his country expected
to return to mild growth this year and still planned to issue a
eurobond worth up to 200 million euros but was carefully
watching the situation in the light of the Greek debt crisis.
For factboxes on the EBRD, please click on: []
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For a Take-a-Look on the EBRD meeting: []
(Writing by Michael Winfrey; editing by Ian Jones)
