EBRD-East Europe wary of fresh euro bank crunch

LONDON (Reuters) - A new banking crunch in the euro zone risks another sharp retreat by western parent banks from vulnerable economies in central and eastern Europe, a process that must be slowed to preserve growth, officials from the region said on Friday.

Countries backing Europe's development bank for the former communist bloc elected a new president - for the first time from non-euro member Britain - just as fears grow that a Greek exit from the currency could hit emerging Europe's lenders.

Many east European countries outside the euro have banks wholly or largely owned by western parents, which are reducing lending as they try to fix balance sheets damaged by the sovereign debt crisis. They fear another sudden or sharp pullback to home markets could be devastating.

"The financial system continues to be vulnerable and the need to deleverage continues to be very strong," Polish central bank chief Marek Belka told delegates at the annual meeting of the European Bank for Reconstruction and Development.

"This deleveraging is potentially more dangerous in countries with a high presence of foreign banks."

Belka, who chided policymakers from richer economies for their inability to control the crisis, said this reduction of bank lending and debts, or deleveraging, was necessary but that the pace and location of it must be managed carefully.

"The so-called west has lost its monopoly for wisdom and I'm saying it without Schadenfreude," he said.

The shareholders of the European Bank for Reconstruction and Development elected Britain's most senior civil servant, Suma Chakrabarti, as president, replacing Germany's Thomas Mirow.

Mirow, whose campaign failed to get Berlin's backing, said EBRD-sponsored efforts to slow deleveraging had worked in the past two years but a threat of flight by western banks remained.

"What we are clearly seeing is that western banks that have engaged in the region without putting CEE (central and eastern Europe) into the focus of their activities tend to retrench and to sell off their assets," he said.

Mirow expressed particular concern about countries where subsidiaries of Greek banks have played an important role, with Bulgaria, Romania and Serbia seen as most vulnerable.

GROWTH HEADWINDS

The EBRD, set up in 1991 to manage the transition of former communist countries to market economies but with a recently-expanded remit to North Africa and the Middle East, predicted a substantial growth slowdown in its monitored economies in 2012.

Renewed fears about the euro zone crisis present new risks for the region's economies, which are already struggling to grow as the crisis hits their main trading partners in the euro zone.

It has also complicated efforts by the few countries still trying to join the single currency, with Latvia's finance minister saying its goal to join in 2014 was now in the balance.

"At this moment we are sticking to our euro zone strategy. Definitely we will be able to meet all the Maastricht criteria next spring. But of course the final solution will depend on the situation in the euro zone," Andris Vilks told Reuters.

In the EBRD's latest economic outlook for the whole region, which for the first time includes four countries in the Middle East and North Africa, the EBRD forecast expansion of 3.1 per cent in 2012, after 4.6 per cent in 2011. The Bank's economists see only a modest pick up to 3.7 per cent next year.

Although recent data suggests that capital outflows from the region may be leveling off, negative real credit growth and declining exports will continue to impede expansion, it said.

Before the crisis, euro zone lenders saw the region as a main profit driver because of faster growth and low lending levels, but they have been reducing exposure to the region since the end of last year with deleveraging that has squeezed lending even as many countries in the region slide into recession.

Foreign banks control 60-90 percent of the region's banking assets. The International Monetary Fund says the outflow could lead to a drop of up to 6 percent of private credit in central and Eastern Europe in 2012 and 2013 in a downside scenario.

The so-called Vienna Initiative to slow the western bank exit from the region in 2009, which was jointly sponsored by the EBRD, the International Monetary Fund, national bank regulators and private lenders, was reprised this year.

The EBRD warned it expected bank-related outflows to continue from eastern Europe in coming months as western lenders step up efforts to strengthen their balance sheets.

The central bank governors of Poland and Hungary also said sales of local subsidiaries by Western banks remain a major concern for policymakers.

(Reporting by Carolyn Cohn, Mike Winfrey, Draz Jorgic and Sujata Rao; Writing by Mike Dolan; Editing by Catherine Evans, Ron Askew)

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