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IMF: Emerging Europe must cut deficits |
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Thursday, 21 October 2010 |
Governments in emerging Europe must act quickly to cut their budget
deficits or else risk fiscal crises similar to those experienced by
Greece that would inflict severe damage on already weakened banking
systems, the International Monetary Fund said.
The IMF said economies in eastern Europe will grow by 3.9% in 2010 and
3.8% in 2011, having contracted by 6% last year. But in its twice-yearly
Regional Economic Outlook for Europe, the IMF warned that many
economies face major challenges if they are to maintain the recovery.
And it said much will depend on developments in the euro zone, which is
eastern Europe's main export market.
"The main downside risk for emerging Europe is the revival of sovereign
stress in advanced Europe, which could depress growth in the euro area
and lead to adverse spillovers for the region," the IMF said.
And even without an intensification of the euro zone's fiscal crisis,
investors may become concerned about the ability of some eastern
European governments to repay their debts, and become extremely
reluctant to lend, as they did to Greece. To protect themselves against
that possibility, the IMF said many eastern European governments need to
take urgent action to cut their budget deficits.
"To prevent the emergence of market concerns, countries with high fiscal
vulnerabilities may need to proceed with fiscal consolidation at a
faster rate," the IMF said.
The Fund said it expects Poland's budget deficit to rise to 7.4% of
gross domestic product in 2010, up from 7.1% last year, before falling
to 6.7% of GDP in 2011. In emerging Europe as a whole, it expects budget
deficits to fall to 5.2% of GDP this year and 4.2% of GDP next year
from 6% in 2009.
The Fund said a sharp rise in government-bond yields, and a fall in the
market value of government bonds, could have a negative impact on local
banking systems.
"Financial sectors would be particularly affected, especially in those
countries where banks hold a large portion of their assets in the form
of government securities—Albania, Hungary, Poland, and Turkey," the Fund
said. "In such countries, bank capitalization could be significantly
impacted if the value of government securities declined. This in turn
could curtail the supply of bank credit."
The Fund said that many economies in emerging Europe will need to find
new sources of growth, relying more on exports than domestic demand.
Prior to the onset of the financial crisis in 2007, eastern Europe
experienced a surge in economic growth. But that was largely driven by a
surge in capital inflows that funded strong growth in domestic demand,
something that isn't likely to happen again, the IMF said.
"Capital inflows are unlikely to return to pre-crisis levels, and
domestic demand is likely to remain depressed," the Fund said. "Future
growth must rely more on the tradable sector and less on the nontradable
sector—especially in countries that had built up large imbalances
during the boom."
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