EBRD Chief Economist Erik Berglof: Eastern European banks Underestimated Bad Loans

• Western lenders could sell Central and Eastern European subsidiaries, Berglof says

Eastern European banks have underestimated the value of bad loans resulting from the financial crisis and their impact will be felt across the region in 2010, according to Erik Berglof, Chief Economist of the European Bank for Reconstruction and Development (EBRD). He warned the Central European Investment Summit organized by Reuters that the regional banking system was still fragile and that the Western banks" strategy to sell assets as a condition for obtaining State aid could bring further detriment to the region.

The EBRD official also said that Russia was one of the economies where the aggregated amount of bad loans was much larger than officially admitted. "We know that non-performing loans are increasing. They haven"t been increasing at the pace we were worried about (at the start) but that is because in some countries the way official statistics report them is not satisfactory," Berglof said.

The EBRD official emphasized that the European Commission"s demand that Western banks get rid of non-core assets (as a condition for obtaining State aid) could prompt the banks to sell off Eastern and Central European subsidiaries and further tighten credit to the region. "They are asking for...the disposal of non-strategic assets. But some of these assets are strategic for our region. Most of these subsidiaries are systemic for our region," Berglof said.

Erik Berglof pointed out that the EBRD Annual Transition Report, to be released in a few weeks, would include a downward revision of the Central and Eastern Europe economic decline forecast for 2009 from the current (-)5.2 per cent and an upward revision of the forecast for 2010, from the current 1.4 per cent.

"It"s safe to say that compared to our forecast in May, the forecast will be lower this year because of information from Q2 numbers and what we know from Q3," Berglof said. He further emphasized that the economic status of many countries continued to deteriorate and expressed concern with Ukraine in particular, where divergence among governmental officials were worsening the condition of the budget.