* Bank says outside risks main E.Europe problem
* Countries need to act to avoid imbalances returning
* Kazakhstan, Montenegro eyeing eurobond issues
* Croatia says still wants to join the euro
(Adds Mirow, Ghizzoni, Vujcic, Kiraly)
By Sebastian Tong and Gordana Filipovic
ZAGREB, May 14 (Reuters) - Fiscal cuts in western Europe
prompted by the euro zone deficit crisis will hit demand for
exports from central and Eastern Europe and undermine the
emerging region's recovery, the EBRD said on Friday.
The European Bank for Reconstruction and Development said
the impact of western Europe's fiscal woes would show in its new
growth forecasts for the CEE region, the market in which the
crisis hit was worst and most drawn-out.
Concerns that euro zone austerity may weigh on growth have
also affected monetary policy, with the Czech National Bank
saying the belt-tightening had contributed to a surprise rate
cut last week.
The EBRD urged countries in the former Communist bloc to act
now to avoid a return of the imbalances that made the crisis
worse and more drawn-out than in any other emerging market: an
overreliance on external funding and unsustainable credit booms.
"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 at 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.
Countries from the Baltics to the Black Sea are trying to
recover ground after a downturn that saw Latvia's economy
contract 18 percent and others shrink in the high single digits.
Although Poland, the Czech Republic, and several other
countries are expected to show growth this year, low demand from
the euro zone -- the main trading partner -- is expected to
prolong pain for countries expected to shrink such as Hungary
and Romania.
"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
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.
"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 imbalances has been 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.
But 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."
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."
Somewhat calmer markets also encouraged Kazakhstan and
Montenegro to dip their toes back into the eurobond market, a
sign that emerging economy policymakers believe the immediate
threat of contagion from the euro zone crisis 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.
Despite the fears of contagion, Serbia's finance minister
said growth could double next year to 4 to 5 percent after a
lacklustre 2010 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: []
and []
For a Take-a-Look on the EBRD meeting: []
(Writing by Michael Winfrey and Boris Groendahl; editing by
John Stonestreet)
