CAPITAL ECONOMICS REPORT Eastern Europe has not yet managed to overcome the crisis

The economies of Hungary, Romania, Bulgaria, Latvia, Lithuania and Estonia will continue to shrink for the second year in a row in 2010, causing a drop in consumer and mortgage loans, says Neil Shearing, an analyst with Capital Economics, who added that "a new significant deterioration of the international financial environment could lead to a new wave of bank troubles".

The slow pace at which lending is growing is due to the high degree of debt of individuals and companies, rather than prudent lending, the analyst said.

According to the latest report, by Capital Economics, Eastern Europe banks have not yet successfully overcome the issues of the crisis, and the outlook for the financial services sector remains a cause for concern: "Borrowing remains weak in Hungary, Romania, Bulgaria, Latvia, Lithuania and Estonia. Lending terms will most likely remain very tight this year, as the excesses of the last decade will continue to make their effects felt".

Eastern Europe banks and their parent banks from Austria, Italy, Germany and Sweden announced an increase in the volume of non-performing loans, after the regional currencies depreciated last year, increasing the costs of loans denominated in foreign currencies, the quoted report says. "It took the IMF to save Hungary, Romania, Latvia and Ukraine, since these countries couldn"t afford to pay off their foreign debt", the report says.

Latvia, Estonia, Romania and Bulgaria have the highest rates of non-performing loans in the region, of 14.5%, 12%, 11.2% and 10.1% respectively, according to Capital Economics. Non-performing loans have reached 9.5% in Hungary and 8.2% in Lithuania, Shearing said.

Foreign currency denominated loans account for 91% of the total in Latvia, 87.1% in Estonia and 71.8% in Lithuania, according to Capital Economics. In Hungary, Romania and Bulgaria, the account for around two thirds of the total volume of loans.

Foreign denominated loans will continue to affect the quality of banks" assets, for a long time, as many banks have 30 year mortgages on their balance sheets.

Banks of Poland, Czech Republic, Slovakia and Turkey are in "reasonable shape", due to a lower share of foreign currency loans and more accessible lending for individuals and companies.