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East Europe economic mood sour as EBRD meets

Central and Eastern Europe faces at least another year of economic difficulties and there are signs at best of stabilization rather than recovery, regional policymakers and business leaders said.

Speaking at the annual meeting of the European Bank for Reconstruction and Development, delegates and EBRD officials said there were some signs the worst of the credit crisis may be over but any stabilization would be slow and setbacks possible.

“We are now predicting a slow 'bottoming out' of the recession this year followed by the beginnings of recovery in 2010,” EBRD President Thomas Mirow said in a speech to be delivered later on Friday.

But he was also quoted as saying underlined there were “big caveats” to that, and the bank's chief economist underlined any recovery will not be quick.

The IMF last month slashed its forecasts for the region's economies, predicting double digit contractions for the Baltic states and a slide into recession even for economies, like Poland, which have been most resilient in the crisis so far.

Both the EBRD and IMF see some of the region's biggest economies - notably Poland and the Czech Republic - returning to minimal growth next year. But that remains a poor result compared to years of booming expansion and private sector bankers attending the conference were much gloomier.

“I am very far from saying we are seeing a turnaround,” said Herbert Stepic, chief executive at Austrian bank Raiffeisen International, which has extensive business in eastern Europe.

“The real downturn is starting now. We are coming to the real deep crisis in the real economy,” he said.

Stepic said the toxic structured credit assets affecting global banks were not a major problem for east Europe's banks but that recession this year would be a bigger issue.

Burdened by high external deficits and with trouble borrowing in the global credit crunch, the eastern Europeans have mostly steered clear of the fiscal stimulus used by major western economies.

Indeed, most have opted to cut spending, either on their own or as part of deals with the International Monetary Fund. Many of the region's western-owned banks have been pressing for governments to do more to shore up the financial sector.

Görgy Surányi, regional chief for Italian bank Intesa Sanpaolo and a former Hungary central bank chief, said he was worried that fiscal and monetary policies being adopted across the region could exaggerate the downturn.

“Most of them, except perhaps the Czechs responded pro-cyclically which will cause an even deeper recession (in coming months),” he said.

This year's annual meeting of the EBRD, set up in 1991 to help former communist countries of the region in their transition to market economies, is the first since the global credit crunch savaged many economies in eastern Europe.

The crisis - exaggerated by the fact that many banks in region were owned by ailing western European parents - forced a freezing of credit, several bailouts by the International Monetary Fund and a severe economic slowdown.

Data released on Friday showed regional economies shrank faster than expected in the first quarter after imploding demand in key export markets hit industries, while weak GDP data from key export market Germany leaves a grim near-term outlook.

Hungary's economy contracted by an annual 6.4%, the biggest fall since the country began publishing quarterly figures in 1996, and more than the 5.9% drop analysts had expected, data showed on Friday.

Neighboring Slovakia, which had one of the highest growth rates in the European Union in the past few years, posted a 5.4% annual fall in real GDP compared with 2.5% growth in the last quarter of 2008.

The Czech economy fell by 3.4% while the Romanian economy shrank by an annual 6.4% in the first quarter, more than double the pace economists forecast.

The EBRD is currently forecasting a 5.2% contraction this year of the entire region it operates in - which includes non-EU countries further east.

Regional policymakers said they would try to get through the crisis as best they could without the need for external help.

“Currently we are able to do it by our own. But we also have to think about our future prospects and of course if additional risks appear we (could go to) the European Commission,” Lithuania's Finance Minister Algirdas Semeta, told Reuters at the EBRD meeting

Czech central bank governor Zdenek Tuma bemoaned the lack of support from western European institutions.

“I believe the European institutions can be more active... for instance... if Poland had a swap with the ECB, it probably wouldn't have applied for the (IMF) flexible credit line... The ECB doesn't want to do that (provide swaps).”

“It's a question for the ECB and the European Commission in which they can be more active.” (Reuters)