Friday, March 6, 2009

East Europe Crisis ‘Manageable,’ EBRD’s Berglof Says

By Agnes Lovasz

March 5 (Bloomberg) -- Eastern Europe’s financial crisis is “manageable” so long as western banks continue lending to their units in the region, said European Bank for Reconstruction and Development Chief Economist Erik Berglof.

Emerging European nations are struggling to refinance short- term debt as the global crisis that has left banks with more than $2 trillion in losses and writedowns cuts off credit and investment and plunges most of the region into a recession.

“The key is continued support from banks in Western Europe to their subsidiaries in the east,” Berglof said in an interview yesterday in London. “As long as those flows continue, that’s a very large part of the solution to the problem. The situation is manageable but we must make sure that it is being managed.”

Eastern Europe’s refinancing need is about $200 billion, based on short-term external debt owed by the region’s banks to foreign creditors, Berglof said. Excluding Russia and Kazakhstan, which can use their reserves to support banks, the amount is $130 billion, with more than half owed to western banks by their eastern units, he said. Sustained flows to the subsidiaries will be “a major source of filling the funding gap,” he said.

The EBRD is investing a record 7 billion euros ($8.8 billion) in central and eastern Europe this year, compared with about 5.8 billion euros last year.

Exceeding Target

“The 7 billion is a target -- if the needs are larger we may be able to exceed that,” Berglof said. About 3 billion euros of that amount will be used to help recapitalize the region’s banks, and about the same amount next year, the bank said.

The EBRD is in talks about a “role” in OTP Bank Nyrt., Hungary’s largest lender, and considering to provide a 100- million euro loan to Banca Comerciala Romana SA, Romania’s biggest bank by assets, to lend on to companies. It also said last month it’s ready to invest 500 million euros in banks in Ukraine, where it already lent $75 million to Raiffeisen International Bank-Holding AG’s local unit in December.

A 24.5 billion-euro ($31 billion) aid package for the region’s banks and businesses, announced by the EBRD, World Bank, and European Investment Bank announced last week, along with International Monetary Fund bailouts for Latvia, Hungary, Serbia, Ukraine and Belarus help significantly to prevent a worst-case scenario, according to Berglof. Most recently, Romania said it is seeking financial help from outside.

No Stigma

More countries will turn to the IMF, Berglof predicted, adding that they shouldn’t be stigmatized. An IMF program helps governments focus better, he said.

“This is a crisis of a gravity we have never seen and even a prudent government can go and seek international assistance in this environment,” Berglof said. “Probably more countries will go and seek IMF support but it should be viewed positively. It shouldn’t be viewed as a stigma.”

The development bank cut its average economic growth forecast for the entire region to 0.1 percent in January from the 2.5 percent projected in November, predicting recessions in Ukraine, Hungary and the three Baltic states. Another revision is due by May, Berglof said, without giving an estimate.

“It’s probably fair to say that we shouldn’t expect positive growth in the region,” he said. “Within that are variations, but the situation in the export markets and the pressures on the financial system are having an impact.”

‘Not the Time’

Ukraine and Latvia face the biggest difficulties, while Poland and the Czech Republic are holding up better than the rest of the region, Berglof said, as they have pursued tighter fiscal policies and lending in foreign currencies was less prevalent.

Some economists have recommended that Bulgaria, Latvia, Lithuania and Estonia drop their fixed exchange-rate regimes. New York University Professor Nouriel Roubini, who predicted the U.S. recession two years ago, was one of them. Berglof disagrees.

“This is probably not the time to get rid of these pegs or currency boards,” he said. “It is a very difficult context for them, but this is not the time to change this. They would not benefit a lot from devaluation.”

All free floating currencies in the region have tumbled in recent months as investors fled riskier assets.

The Polish zloty has dropped 30 percent against the euro in the past six months, making it the worst-performing emerging- market currency. Hungary’s forint has fallen 22 percent and the Romanian leu has declined 16 percent as investors fled riskier assets, increasing default risk by borrowers many of whom owe money in foreign currencies.

European banks, such as Austria’s Raiffeisen and Erste Bank AG, and Sweden’s SEB AB, may need to raise as much as 40 billion euros of additional capital by 2010 because of loan losses in central and Eastern Europe, JPMorgan Chase & Co. analysts said in a note today.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

No comments: