EBRD forecasts substantial slowdown in Central and Eastern Europe

By bne IntelliNews November 8, 2012

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In its "Transitions Report 2012," released November 7, the European Bank for Reconstruction and Development (EBRD) says the outlook for its region, which encompasses Emerging Europe and the former Soviet Union, continues to be driven by developments in the Eurozone crisis and its global repercussions, including its impact on commodity prices.

In the EBRD's baseline forecast, the region will see a substantial slowdown compared with 2011 - both in this year and next - as a result of the crisis. Central and Southeast Europe in particular will experience slow growth and some of the countries have entered or will re-enter mild recessions.

"Slowdowns are projected in every Central European, Baltic, and South-Eastern European country, and negative or near-zero growth in 2012 is expected in eight out of the 17 countries in this group," it said.

Previously seen as a boost, the EBRD says connections to the Eurozone are now a hindrance, and as the sovereign debt crisis has deteriorated, so the recovery has stalled in many countries of the transition region. Exports and capital inflows have declined and the region's banks have lost significant external funding from their Eurozone parent banks, the report points out.

"The region's exposure to the euro area has thus recently turned from a benefit into a disadvantage, especially for Central and South-Eastern Europe," it said. "The outlook for the region continues to be crucially driven by developments in the Eurozone crisis. In the baseline, the region will see a substantial slow-down this year and next, relative to 2011."

Meanwhile, although highlighting the risks to the region from the dominant presence of foreign banks on their markets, the EBRD cautions that their role as a force for both good and bad is overestimated.

Those banks were a (or even the) main culprit of the 2005-2008 credit bubble in foreign currency that burst in 2009, and contributed to falls in output of about 6% on average in the countries of Central and Southeast Europe and 14-17% in the Baltic states.

"[M]ultinational banking was one of the conduits that transmitted the financial crisis from the West into the transition region," it notes. "As a result, foreign banks mutated from paragons of integration to pariahs of the crisis within barely a year. A review of the wealth of literature on multinational and cross-border banking based on evidence from before, during and after the 2008-09 crisis shows that both of these images are exaggerated."

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