Feb. 20 (Bloomberg) -- Europe’s banking system faces growing risks because of losses in the region’s emerging markets, and the crisis may require a region-wide rescue effort, said New York University economist Nouriel Roubini.

“The banking problem in Europe is becoming more severe,” Roubini said in a Bloomberg Television interview. “You have a series of countries that are really in trouble,” Roubini said, citing Latvia, Estonia, Lithuania, Hungary, Belarus and Ukraine.

German and French officials this week expressed concern about a slide in investor confidence in smaller European economies. The cost of insuring Irish, Greek and Spanish debt against default has climbed to records, and mounting losses in eastern Europe among Austrian banks sent that nation’s bond-yield premiums to an unprecedented level.

European lenders are taking steps that could increase state control of banks as the recession deepens. German Chancellor Angela Merkel’s cabinet approved draft legislation this week that allows for the takeover of Hypo Real Estate Holding AG, which would be the first German bank nationalization since the 1930s.

The continent’s largest financial companies have reported $316 billion in writedowns and credit-related losses since the collapse of the U.S. subprime mortgage market in 2007 spread to other asset classes and continents. The market turmoil has forced European lenders to raise $370 billion in fresh capital and government-led bailouts from London to Zurich to Berlin, according to Bloomberg data.

EU Aid

Roubini said European nations may go further and assist member states that are unable to rescue their own banks. “Even the European Union now is thinking of helping those sovereigns and their banking systems,” he said.

“There are significant problems in terms of debt and also banking problems in places like Ireland, for example,” Roubini said. “But also a country like Greece has a huge amount of stock of public debt.”

Moody’s Investors Service Inc. on Feb. 17 said some of Europe’s largest banks may be downgraded because of loans to eastern Europe, sending Italy’s UniCredit SpA, which has aggressively expanded in the region, to its lowest in 12 years.

‘Pressure’ on Ratings

Moody’s sees “continuous downward rating pressure” in the region as a result of worsening asset quality and western banks’ reliance on short-term funding, the ratings company said in a report.

The International Monetary Fund has offered aid worth about $52 billion to Latvia, Hungary, Serbia and Ukraine.

Roubini, who predicted the global credit crisis, also discussed the need for plans to revive growth. The best approach in the euro zone is “fiscal stimulus in the short term but fiscal consolidation over the medium term,” he said.

He noted that while the $787 billion U.S. fiscal stimulus package, signed into law this week by President Barack Obama, is necessary, it may not be sufficient and will put the country deeper into debt.

“We’re going to add $4 trillion to $5 trillion to the public debt over the next few years,” he said. “Down the line, maybe two or four years, there may be a downgrade of even the United States.”

Still, he said, the U.S. is taking appropriate steps compared with other economies. He said the European Central Bank and Japan are “behind the curve.”

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.netErik Schatzker in New York at eschatzker@bloomberg.net

Last Updated: February 20, 2009 11:41 EST