Analytics, Budget, Economics, EU – Baltic States

The EU's eastern members came under sharp scrutiny last month when mainstream global media jumped on warnings of economic imbalances there and suggestions that the region could be "the sub-prime of Europe" for some euro zone banks.

Many papers cited data from the Bank for International Settlements showing the total claim of foreign banks and their affiliates in Eastern Europe amounted to EUR 1.7 trillion.

But in a letter to the ''Financial Times'' on Wednesday, the Chief Economist of the European Bank for Reconstruction and Development (EBRD) said that number was just the size of the overall balance sheet of the region's foreign-owned banks, not exposure to debt.

"The comparison is simply nonsensical," the EBRD's Eric Berglof wrote. "A much better measure of refinancing needs is short-term external debt owed by the region's banking sectors to foreign creditors."

He said that excluding Russia and Kazakhstan, which can count on their own resources thanks to years of high oil prices, the short-term debt owed by local banking sectors to foreign creditors was about USD 130 billion, and more than half of that was debt owed by subsidiaries to parent banks.

Worries around the region have so far centered around the amount of external financing needed to keep them growing faster than their developed western neighbors, but details on how much that means have been cloudy.

Economists are also convinced that most countries in the region will see their economies contract this year. Even the best case scenarios call for very minimal growth for the region's best off economies.

The EBRD, the International Monetary Fund and the World Bank have long urged the handful of western banks from places like Austria, Italy, France and Sweden to continue backing their units in the region.

And on Wednesday, the head of Italian bank UniCredit, the largest lender to the Eastern Europe, said it would support its units in the region, echoing statements by others including Austria's Erste.

Berglof's comments were also backed up by a paper from the Institute for International Finances (IIF), an association of major financial service firms with 400 members worldwide.

It also said the EUR 1.7 trillion figures was misleading, and that a projected contraction in private capital flows to emerging Europe - seen as the main risk to the region's banking sector, and therefore western banks - would probably be limited to Russia and Ukraine.

Net private flows to Poland, the Czech Republic, Hungary, Romania, Bulgaria and Turkey were expected to continue at "the much slower but still substantial pace of USD 60 billion, equivalent to 5% of their combined GDP," the IIF said.

It said that although that figure was 40% of the peak seen in 2007, borrowing in these countries from foreign banks would still grow by a projected 1.5% of their GDP.

Parent banks would provide the capital barring their experiencing more intense pressure from the crisis. "Data available since September, however, suggest that foreign parents have thus far increased or sustained financing for their local subsidiaries, which remain important franchises for their owners," it said.

The Czech Republic and Poland have been at pains to convince investors that their banking sectors are sound and the Czech foreign owned banks are actually net lenders to their parents. They joined with four other countries' banking supervisors on Wednesday to complain about negative press over their banking systems.

The IIF said the situation in the region was not as bad as much of what had been presented by some media. "Greater differentiation about the circumstances of individual countries combined with analysis of recent financing flows and the scale of indebtedness suggests that the situation in a number of important countries is decidedly more favorable than has been generally understood," it said.