Wall Street Journal
May 15 2010

Eastern Europe's Recovery Path Uncertain


ZAGREB, Croatia'The European Bank for Reconstruction and Development
said Saturday the recovery path in eastern Europe and the former
Soviet Union is "exceptionally uncertain" at present with risks tilted
to the downside in the short-term given the current volatility
surrounding euro zone sovereign debt.

The development bank said the recovery'which is underway in most
countries in the region'is now being "overshadowed by euro zone market
volatility and increasing pressures to accelerate fiscal consolidation
in East and West."

As a result, external risks are rising, while domestic risks in
emerging Europe, such as rising unemployment and bad loans are
leveling off, the EBRD said.

To date, though, the crisis in Greece hasn't had any significant
impact on the region, the EBRD said.

But there are concerns, particularly in southeastern Europe, given the
role Greek banks play there, the EBRD said. "Another risk is weaker
European Union growth as a result of either fiscal consolidation, or
renewed problems in the European banking sectors."

The EBRD was founded in 1991 to help countries in eastern Europe make
the transition to market from centrally planned economies after the
collapse of communism.

After experiencing between 2008 and 2009 the worst financial crisis
since the start of the transition process, the recovery in the region
has now begun, although the pace remains slow on average and lagging
most other emerging markets regions, the EBRD said.

In its latest report on the 29 countries in which it invests, the EBRD
said their combined gross domestic product will grow by 3.7% this
year, having forecast in January that GDP would expand by 3.3%.

By contrast, the International Monetary Fund expects Asian economies
to expand by 7.1% and Latin America and the Caribbean economies to
grow by 4% in 2010.

"The deep recessions of late 2008 and 2009 continue to have knock-on
effects in the form of high nonperforming loans and unemployment,
which constrain credit growth and the recovery of domestic demand."

The bank noted that there is increasing divergence across countries in
the region, with little evidence to date of a sustained recovery in
southeastern Europe.

On the contrary, in Turkey and Armenia much faster recoveries are
underway, while Russia and the Slovak Republic are rebounding much
faster than initially expected, the EBRD said.

The development bank said the Russian economy'by far the region's
largest'will likely grow by 4.4% this year and 4.6% in 2011. Surging
oil prices have helped Russia's economy stage a comeback from its
worst recession in 15 years, but the country remains highly dependent
on commodity prices, particularly oil, the EBRD said.

Turkey and Armenia are expected to be among the region's best
performers this year, having staged an impressive rebound. The EBRD
expects Turkey's economy to grow by 5.9% this year and 4% in 2011,
while Armenia's economy is expected to expand by 10% in 2010 and 3% in

Poland, which managed to avoid a recession, will likely grow by 2.6%
this year and 3.3% in 2010.

Meanwhile, Latvia and Lithuania'both of whom peg their currencies to
the euro'are starting to see their deep recessions bottoming out, the
EBRD said. But the pace of the recovery will remain constrained and
both economies are still expected to register contractions in
year-over-year terms, the EBRD said. It expects Latvia's economy to
shrink by 3% in 2010, then expand by 3% in 2011 and Lithuania's
economy to shrink by 1.5% this year, then grow by 3% in 2011.

"By contrast, Estonia should show a return to moderate growth this
year, and sentiment should be further buoyed by euro adoption in 2011,
which looks likely following the favorable convergence assessment by
the European Commission on May 12, 2010," the EBRD said.

Outside of the Baltic states, Ukraine suffered one of the largest
contractions as a result of the global slowdown. But following
successful presidential elections earlier this year, confidence is
returning and the EBRD forecasts positive growth of 4% in Ukraine this
year and 4% again in 2011.

"Market confidence returned to Ukraine after the presidential
elections as the authorities focused on defining their structural
reform and fiscal consolidation agenda and reengaged in program
discussions with the International Monetary Fund."

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