(rewrites throughout)
By Sebastian Tong and Sujata Rao
LONDON, Oct 15 (Reuters) - Emerging European economies will
likely grow an average 2.5 percent next year as a "fragile and
patchy" recovery takes hold but the risk of a banking collapse
remains high in some countries, the European Bank for
Reconstruction and Development (EBRD) said on Thursday.
Senior economists at the development bank said the
likelihood of a region-wide meltdown from any bank failure was
low but stressed economies need to reform a growth model that
has left them over-reliant on foreign capital.
"Foreign banks contributed to higher debt levels (in the
region) and had some role in fuelling credit bubbles. They also
have played a role in increasing foreign exchange exposure which
has turned out to be a major vulnerability during the crisis,"
EBRD Chief Economist Erik Berglof told a media briefing.
"We need to find ways of addressing the failures of this
model without fundamentally changing it...There are aspects of
it we need to control."
The London-based lender revised its 2009 forecast for the
region as a whole to a 6.3 percent contraction, steeper than the
5.2 percent decline previously forecast, but said positive
third-quarter signs suggested the downturn was bottoming out in
some economies.
The EBRD said its current 2010 growth forecast, up from its
previous 1.5 percent estimate, reflects the deeper-than-expected
downturn in the first half of 2009 rather than a vigorous
recovery in 2010.
The forecasts were previously revised in May, the second
time after a January adjustment. In November, it predicted a
three percent 2009 economic expansion for the region.
"There is a tendency to equate 'normal' growth with the boom
phase of 2006-2007 but I don't think we will return to that for
a long time, if ever. And I don't think we should as that was
unsustainable," said Jeromin Zettelmeyer, Director for Policy
Studies at the development bank told Reuters.
BANK RISKS
Set up at the end of the Cold War to help former communist
economies adjust to free markets, the EBRD has come under
criticism from some of its 60-odd country shareholders for
failing to warn eastern Europe and Central Asia about the
dangers of overexposure to foreign borrowing.
But the bank said it remained concerned that reduced levels
of Western-bank lending, in addition to a weakened export
sector, would constrain growth in its 29 countries of operation.
Rising non-performing loans, underreported in some countries
posed a particular threat. The pace of economic recovery in
Russia and Kazakhstan, in particular, could be affected by their
weak banking systems, the EBRD said.
"The risk that individual banking systems (in the region)
could go down remains high as NPLs (non-performing loans) test
the ability of institutions," Zettelmeyer said, highlighting
Ukraine as an example of a country where bad debt is
under-reported.
But contagion risk arising from any banking failure had
receded with the overall stabilisation of the global financial
system, he said.
The EBRD warned the region would face the social costs of
its economic crisis in earnest next year, when corporate
bankruptcies and unemployment will continue to rise.
Differences in gross domestic product (GDP) performance of
countries in the region will also be stark next year, with the
currency pegs adopted by Bulgaria, Latvia and Lithuania likely
slowing the recovery for these economies, the EBRD said.
The bank said Russia's economy would shrink 8.5 percent in
2009 before rebounding 3.1 percent next year.
Countries that have sound banking systems such as Albania,
Poland, Slovakia and Slovenia are likely to enjoy faster 2010
GDP growth of 2-5 percent.
The EBRD revised down its 2010 GDP forecast for Hungary to a
0.9-percent decline, saying slower growth was a result of a
continued credit crunch and necessary fiscal adjustments.
(Reporting by Sebastian Tong and Sujata Rao)
