World Bank - euro zone threatens emerging Europe, Asia

WASHINGTON Sat Sep 24, 2011 4:26am IST

Euro and Swiss Franc notes are seen in this illustration picture in Lausanne August 9, 2011. REUTERS/Denis Balibouse/Files

Euro and Swiss Franc notes are seen in this illustration picture in Lausanne August 9, 2011.

Credit: Reuters/Denis Balibouse/Files

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WASHINGTON (Reuters) - The euro zone debt crisis threatens the mild recovery underway in emerging European and Central Asian nations, the World Bank said on Friday, adding that main risks for parts of the region come from their exposure to banks in cash-strapped Greece and Italy.

"The region has strong financial linkages to Western Europe, which were source of growth. These linkages were a very big positive in the 2000-2008 period," Philippe Le Houerou, the World Bank's vice president for the ECA region, said during a briefing.

"But they are now becoming sources of vulnerabilities for our countries."

The ECA region, which includes 30 countries, stretches from Poland and the Balkans through Ukraine and Russia to the post-Soviet republics in Central Asia.

"Given the importance of the Greek banks in the Balkans and the Italian banks in Central Europe any problem that they may have could have direct effects in those countries," Le Houerou 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.

"There is a risk that problems in the Southern European zone will spillover and weaken the financial sector and slow down growth first in the Western Balkans, then possibly in Central Europe and then maybe in Eastern Europe and even Russia," Indermit Gill, the World Bank's chief economist for the region, said.

Some of the French, Austrian and Swedish banks that are active in Emerging Europe also have exposure in Ireland and the troubled countries of the southern part of the euro zone.

"The problem is not the long term," Gill said. "The problem is how disruptions will be managed in the short-term."

Contagion effects in the ECA region can also be triggered by weaker economic prospects in some of the euro zone's strong economies, such as Germany, which would dampen demand for exports from the ECA region, the World Bank said.

The World Bank envisages the ECA region gross domestic product will grow 4.3 percent this year, slowing from 4.5 percent last year and one of the slowest expansions of any developing region.

(Writing by Lidia Kelly; Editing by Neil Stempleman)

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