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Eastern Europe Remains Vulnerable to Euro Crisis, Capital Says

Eastern Europe remains at risk of an escalation in the euro crisis because of its dependency on external borrowing, a shortage of credit and a high level of non-performing loans, Capital Economics Ltd. said.

Vulnerabilities in the region persist even after the European Central Bank’s bond-buying plan and the Federal Reserve’s third round of quantitative easing cut financial-contagion risks, Liza Ermolenko, an emerging-market economist at London-based Capital, wrote in an e-mailed note.

Luxembourg Prime Minister Jean-Claude Juncker said yesterday the ECB’s bond-purchase plan isn’t enough to solve the debt crisis. Finnish Prime Minister Jyrki Katainen said today investors continue to “worry” about a possible breakup of the 17-member currency bloc.

“We fear” that the ECB’s so-called Outright Monetary Transactions program to buy bonds “will just delay a further deepening of the euro crisis,” Ermolenko wrote. “If we are right and tensions in the euro zone do escalate, it would become markedly harder for banks in emerging Europe to roll over their debt.”

Credit continues to shrink in the Baltic states and Hungary, while there are signs of a lending slowdown in Poland, Ermolenko wrote.

Non-performing loans make up 18 percent of the total in Lithuania, 15.9 percent in Romania and 14.9 percent in Bulgaria, Capital said. Foreign-currency loans account for 80.9 percent of the total in Latvia, 73 percent in Lithuania and 64.3 percent in Romania, it said.

Short-term external debt was 35.7 percent of gross domestic product in Latvia, 25.8 percent in Estonia and 14.6 percent in Hungary, according to Capital.

Western banks have pulled 15 billion euros ($19.5 billion) of capital from the region’s banks in the last year and the withdrawals didn’t abate after the ECB’s longer-term refinancing operations began in December, Ermolenko wrote.

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