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Reconstruction bank makes eastern Europe a top priority.

The European Bank for Reconstruction and Development has warned against excessive optimism about global economic recovery.

And it has said bolstering eastern Europe's weakened banks and debt restructuring were now key priorities.

EBRD president Thomas Mirow said the economic crisis, which has exposed eastern and central Europe as the weakest among emerging markets, was likely to have a severe social impact, while non-performing loans and corporate defaults could derail the fledgling recovery.

He said: "I would guard against excessive optimism. The social impact of the crisis will come with a time-lag, but it will undoubtedly be severe.'' "Non-performing loans are still significantly below expected peaks. And corporate defaults could have knock-on effects on supply and payment chains.'' He said action was needed on two fronts - in banking systems as well as debt restructuring.

Restructuring corporate and household debt "is very difficult, particularly in an environment where a significant share of debt burdens is in foreign currency and governments have to carefully weigh fiscal sustainability,'' Mr Mirow said.

"Secondly, action is required to ensure adequate capitalisation of banking systems even after non-performing loans rise sharply.'' The EBRD revised down its 2009 growth forecast for emerging Europe last month, to a contraction of 5.2 per cent from one of 0.1 per cent growth.

Mr Mirow said the EBRD itself owned stakes in 60 banks in the region and lent to 300 banks but added that broader support may be needed.' The EBRD, the World Bank and the European Investment Bank launched a pounds 21 billion loan programme in February to provide quick, large-scale financing to banks.

The development bank, set up in 1991 to foster the ex-Communist bloc's transition to a market economy, boosted its investment target for 2009 by 30 per cent in response to the crisis and also sanctioned a pounds 365 million loan to Italian bank Unicredit, which has a big presence in eastern Europe.

The EBRD is in talks with other western European banks about similar deals, Mr Mirow said.

The EBRD is investing about pounds 85 million in the Bosnian financial sector after six foreign banks operating in the country committed to keeping their subsidiaries well-capitalised.

Investors have been watching any possible flashpoints in eastern Europe which could have knock-on effects on other European economies.

Speculation over a devaluation of the Latvian lat has led to a freezing up of Latvian money markets and hit Swedish banking stocks in recent weeks, because Swedish banks are exposed to the Latvian economy..
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Publication:The Birmingham Post (England)
Date:Jun 25, 2009
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