Eastern Europe will suffer deeply if major western European banks withdraw from the region and concerted action was needed to keep these lenders engaged there, a European Bank for Reconstruction and Development (EBRD) economist said on Tuesday.
Many large European banks had heavy lending exposure in eastern Europe and the global financial crisis has led to an increase in non-performing loans, denting the banks' performance. Western banks control much of eastern Europe's financial system, Piroska Nagy, senior adviser to the EBRD's chief economist Erik Berglof, told a conference.
"If one or two of these banks start to be removed from the region, the region will go down," Nagy said. "It will be very disruptive. It will be contagion like fire." The EBRD, the World Bank and the European Investment Bank launched a 25 billion-euro ($34.65 billion) loan programme in February to provide quick, large-scale financing to banks.
Nagy said the aim was "to try and find a platform for collective action, to get these big banks interested in staying in the region." "If they withdraw, the region will collapse," she said. The EBRD said last month it would invest 432.4 million euros ($599.2 million) in the eastern and central European subsidiaries of Italian bank Unicredit and that it was in talks with other western European banks about similar deals.
The EBRD revised down its 2009 growth forecast for emerging Europe last month, to a contraction of 5.2 percent from a previous forecast of 0.1 percent growth. "The first quarter of 2009 turned out to be pretty bad," Nagy said. "We do see signs of green shoots, (but) we are not that confident the worst is over. The worst could be yet to come."
Nagy said Latvia, where there has been speculation about a devaluation and concern about the release of a further tranche of international aid, was one of the "hot spots" in emerging Europe. Latvia has the highest levels of private sector debt to gross domestic product in the region, Nagy said.
However, problems in Latvia will not have a direct impact on other countries in eastern Europe, she added. "The Latvian situation will be managed in a concerted manner. We will not see a major disrupted and unsupervised fall-out or contagion from it."
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