Analytics, Banks, Economics, EU – Baltic States, Financial Services

Thomas Mirow.

Russia, Romania, Turkey and Ukraine are the biggest economies in the region that "are expected to suffer severe recessions or depressions," Mirow said in the e-mailed text of a speech delivered in London today. There will be a "slow bottoming-out of the recession this year, followed by the beginnings of recovery in 2010."

The European Bank for Reconstruction and Development is investing in eastern European banks and companies at record levels to cushion economies grappling with the deepest recessions since the region shook off Communist regimes almost two decades ago. Recovery could be hampered by political instability, sharp increases in non-performing loans and corporate defaults, Mirow said.

"The social impact of the crisis will come with a time lag, but it will undoubtedly be severe," he said in the speech. "Non-performing loans are still significantly below expected peaks and corporate defaults could have knock-on effects on supply and payment chains."

The EBRD this month committed funding to Bosnia, banks in Russia, the Nabucco pipeline project bringing Caspian Sea gas to Europe, Albania’s largest shopping mall and a Russia and Commonwealth of Independent States infrastructure fund. It said on June 1 that it plans to set up an emerging European fund for private equity investments, informs Bloomberg/LETA.

The bank also wants to increase support to "systemic banks" in a joint venture with the International Monetary Fund and other financial authorities aimed at keeping western lenders invested in their eastern units, Mirow said, noting "broader support may be needed."

The EBRD has loaned to units of Italy's UniCredit SpA and local banks such as Latvia's Parex Banka AS and Hungary's OTP Bank Nyrt. to help fill an estimated 200 billion dollars refinancing need for eastern Europe, based on short-term external debt owed by the region's banks to foreign creditors, Mirow said in May.

"The EBRD is in close contact with a wide range of banks in the region," Mirow said, adding the bank owns shares in about 60 lenders and has "lending relationships" with 300 banks. "But broader support may be needed," he added.\

The EBRD is "worried" about the situation in Latvia, where the government and the central bank are struggling to keep the lats pegged to the euro inside the exchange rate mechanism. The Baltic economy, which contracted 18% in the first quarter, is juggling "accession in the eurozone on one hand and the impact this has on civil life and civil society on the other hand," Mirow noted.

Emerging European economies will have to restructure household and corporate debt so that "corporate defaults, non- performing loans and rising unemployment remain contained," Mirow said. Loan defaults in emerging Europe pose a "threat to financial stability" and may "trigger a new round of output declines."

Russian Finance Minister Alexei Kudrin warned more than three months ago that his country could face new shockwaves from the global crisis as companies struggle to pay back loans. Russian banks’ overdue loans rose in April to 4.2% of total lending, according to central bank figures.

The EBRD was created in 1991 to invest in former communist countries from the Balkans to Asia to help them transform their economies. Since its formation, the bank has invested more than 41 billion euros, or about 135 billion euros including contributions from private partners.