(Adds background, quotes)
By Sujata Rao and Carolyn Cohn
LONDON, June 24 (Reuters) - The European Bank for
Reconstruction and Development warned on Wednesday against
excessive optimism about global economic recovery and said
bolstering eastern Europe's weakened banks and debt
restructuring were now key priorities.
EBRD President Thomas Mirow said the economic crisis --
which has exposed eastern and central Europe as the weakest
among emerging markets -- will likely have a severe social
impact, while non-performing loans and corporate defaults could
derail the fledgling recovery.
"I would guard against excessive optimism. The social impact
of the crisis will come with a time-lag, but it will undoubtedly
be severe," Mirow told a conference.
"Non-performing loans are still significantly below expected
peaks. And corporate defaults could have knock-on effects on
supply and payment chains."
He said action was needed on two fronts: banking systems as
well as debt restructuring.
Restructuring corporate and household debt "is very
difficult, particularly in an environment where a significant
share of debt burdens is in foreign currency and governments
have to carefully weigh fiscal sustainability," Mirow said.
"Secondly: action is required to ensure adequate
capitalisation of banking systems even after non-performing
loans rise sharply."
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.
Mirow said the EBRD itself owned stakes in 60 banks in the
region and lent to 300 banks but added: "Broader support may be
needed."
The EBRD, the World Bank and the European Investment Bank
launched a 25 billion euro ($35 billion) loan programme in
February to provide quick, large-scale financing to banks.
The development bank, set up in 1991 to foster the
ex-Communist bloc's transition to a market economy, boosted its
investment target for 2009 by 30 percent in response to the
crisis and also sanctioned a 430 million euro ($605 million)
loan to Italian bank Unicredit <CRDI.MI>, which has a big
presence in eastern Europe.
The EBRD is in talks with other western European banks about
similar deals, Mirow said.
The EBRD is investing around 100 million euros ($140
million) in the Bosnian financial sector, the bank said earlier
on Wednesday, after six foreign banks operating in the country
committed to keeping their subsidiaries well-capitalised.
Investors have been watching any possible flashpoints in
eastern Europe which could have contagion effects on other
European economies.
Speculation over a devaluation of the Latvian lat <EURLVL=>
has led to a freezing up of Latvian money markets and hit
Swedish banking stocks in recent weeks, because Swedish banks
are exposed to the Latvian economy.
"We are worried, as everybody is, about the situation,"
Mirow said in answer to a question.
"If you were to ask the Swedes, they would for sure say they
would like the peg to remain in place in order not to see a
depreciation of their assets."
(Editing by Ruth Pitchford)
