The World Bank urges Europe to protect Eastern European

WARSAW, Feb 20 – The World Bank urged European countries to protect the hard-earned gains in boosting economic growth and fighting poverty that were made in Eastern Europe during the past two decades, gains that now are at risk during the global economic downturn.
“Eastern Europe is being hit especially hard in these trying times,” said Indermit Gill, World Bank Europe and Central Asia Chief Economist, who made his comments at a launch of the latest World Bank EU10 Regular Economic Report in the Polish capital. “In choosing EU membership, the EU10 countries committed themselves to openness and integration into the global economy. This path has paid dividendsسpurring economic growth and reducing poverty. If the world turns protectionist, developing countries will find it difficult to protect these hard-won gains. Fiscal stimulus programs in industrialized countries should be used to encourage production in ways that are broadly efficient, not narrowly nationalistic. During times of economic crisis, growing protectionism may be the greatest danger to economic recovery.”
The prospects for economic growth in the EU10 countries in 2009 continue to weaken says the EU10 Regular Economic Report of the World Bank. The prospects for global recovery, for private capital flows, and for growth in the EU10 continue to deteriorate. Forecasts are subject to very high degrees of uncertainty, mostly on the downside. The EU10 economies face the challenges of a dearth of international liquidity, exposure to vulnerable banks, and collapsing export markets. The impact will now be felt strongly in the real economy as defaults spread and foreclosures creep up, and as unemployment rises sharply.
European banks face an entirely new wave of losses in coming months not yet calculated in any government bank rescue aid to date.
The problems of western European banks, most especially in Austria, Sweden and perhaps Switzerland arise from the massive volumes of loans they made during the 2002-2007 period of extreme low international interest rates to clients in eastern European countries.
The risk of these eastern European loans is now coming to light as the global economic recession in both east and west Europe is forcing western banks to pull back. Moody’s Rating Service has just announced it ‘might’ downgrade a number of western European banks with large exposures to eastern Europe.
The Moodys report mentioned especially banks in Eastern Europe owned by western European banks specifically including Raiffeisen, Zenetralbank, Oesterreich and Sweden’s Swedbank.
It is very likely that the new concerns over bank exposures to Eastern Europe will define the next wave of the global financial crisis, one they believe could be even more devastating than the US sub-prime securitization collapse which triggered the entire crisis of confidence.
At the recent EU Finance Ministers’ meeting in Brussels, Austrian Finance Minister Josef Proell reportedly pleaded with his colleagues to come up with a150 billion Euro rescue package for the banks in Eastern Europe. Austrian banks alone have lent 230 billion Euro there, equivalent to 70% of Austria’s GDP.
The EU’s European Bank for Reconstruction and Development (EBRD) in London estimates that bad debts in the east will exceed 10% and ‘may reach 20%.’
The London office of US investment bank, Morgan Stanley has issued a report estimating the total of western European bank lending to the east. According to the report Eastern Europe has borrowed a total of more than $1.7 trillion abroad from mainly west European banks.