* Double-digit growth not return in emerging Europe
* Premature optimism about recovery dangerous
* Bank balance sheets likely to be hit again
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.
He 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. He also said he expects
demand for EBRD financing to remain high.
"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.
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.
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, which invested
heavily there.
"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."
He added that countries in the region must work to
restructure corporate and household debt to curb defaults at the
same time as reviving lending so that the recovery can be
supported.
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.
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.
