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Eastern Europe’s Main Risk Is Western Deleveraging, Berglof Says

Eastern Europe faces the threat of decreased flows of funds from western European parent lenders as tighter capital rules during the debt crisis prompt a cut in funding to units in the region, said Erik Berglof, the European Bank of Reconstruction and Development’s chief economist.

“You have the headquarters making decisions on assets that are very small when you look at the total balance sheet, but when you look at the subsidiaries in eastern Europe, they are systemic in the countries where they operate,” Berglof said in an interview today in Vienna.

About three-quarters of the banking market in eastern Europe is controlled by western European banks, such as Italy’s UniCredit SpA and Austria’s Erste Group Bank AG, are raising capital and reducing assets, causing concerns of a credit drought in Eastern Europe.

The International Monetary Fund, the EBRD, the World Bank and the European Investment Bank, which invested $42 billion in 2009 and 2010 to keep eastern Europe’s banking industry afloat, should “stand ready to provide external assistance and financial support to banks” in the region, the Vienna Initiative group of regulators and policy makers said in a statement after a meeting in the Austrian capital yesterday.

‘Strong Impact’

“We haven’t put specific numbers on this, but we think there is a very strong impact of this -- a potentially strong impact,” Berglof said. “There is some concern about some of the big strategic banks in the region in terms of their commitment.”

Contagion through trade links have so far been limited, he said. The EBRD will publish new economic forecasts for the 29 countries in eastern Europe where it invests. The EBRD in October said that eastern Europe’s economy will expand 3.2 percent on average this year.

The overall growth rate will remain “almost the same but there will be a shift across the region,” he said, noting the EBRD is “quite concerned” about the outlook for central Europe and particularly southeastern Europe.

“When you look at the growth numbers, the impact is not tremendous,” Berglof said. “What we need to catch early is that we see in indicators, manufacturing orders, credit conditions, confidence indicators both in households and industry, they are all pointing downward quite significantly.”

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