World Bank: Euro zone woes hinder emerging Europe, Asia recovery

Fri Apr 20, 2012 8:06pm EDT

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* Recovery slowed down by euro zone troubles

* Region's growth seen 3.4 pct in 2011 from 5.5 pct in 2011

* Region risks credit crunch

By Lidia Kelly

WASHINGTON, April 20 (Reuters) - Continued crisis in the euro zone hurts the modest recovery under way in emerging European and Central Asian nations, the World Bank said on Friday, warning of the risk of a credit crunch in the region due to exposure to Western banks.

"The region is going to witness a slowing down of the recovery, and this is obviously because a large part of the region is very vulnerable to the negative growth prospects in the euro zone," Philippe Le Houerou, the World Bank's vice president for the European and Central Asian region, said during a briefing.

The region, which includes 30 countries and stretches from Poland and the Balkans through Ukraine and Russia to the post-Soviet republics in Central Asia, has strong trade and financial linkages with the euro zone, which helped it grow in the 2000-2008 period.

Economic expansion in the region is to ease to 3.4 percent this year, from 5.5 percent in 2011 - one of the slowest expansions of any developing region, Le Houerou said.

"There is a pattern that's emerged, and again the pattern is pretty consistent with the overall macro story, which is the countries that will see the sharpest slowdown of the recovery would be again the Eastern Europeans and the Balkans," he said.

Turkey is likely to suffer the biggest slowdown in gross domestic product growth to 2.9 percent this year from 8 percent in 2011. Ukraine's GDP growth is expected to ease to 2.5 percent from 5.2 percent last year.

The region also faces risks of a credit crunch, Le Houerou said, as a result of the financial integration of the region with banks in some of the troubled euro zone economies.

"Now we have a legacy where the Western banks are now facing pressures at home, facing pressure to reducing the lending at home and in the emerging markets and there is a risk of credit crunch in the ECA region," he said.

Greek and Italian banks own about 60 percent of Bulgaria's total banking system assets and more than a third of Albania's, according to the World Bank. Nearly half of Croatia's banking assets belong to Italian banks.

"When Western European banks come under pressure then the credit crunch on the region may become a reality," Le Houerou said.

He also urged governments of the region to take fiscal and financial steps to ensure growth.

But because many state coffers in the region have been depleted in recent years, he said, there has been a big increase in fiscal deficit and correspondingly, a spike in the public debt.

"Now, the key issue is - there is a slowing down, there is a difficult external context; there is now not much room for further stimulus through public spending," he said. (Editing by Leslie Adler)

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