The global financial market turmoil will hit eastern Europe, bringing financing problems to the most vulnerable economies and slowing economic growth, the chief economist of the European Bank for Reconstruction and Development has warned.

But in a note to EBRD staff, Erik Berglof also says that, with the economies of eastern Europe and the former Soviet Union growing at record rates and market-oriented reforms in place, most countries "have weathered this turbulence in financial markets very well".

His comments echo a World Bank report published last week which argues the turmoil has so far left the EU's new member states in eastern Europe "relatively unscathed" but could still hit countries with high current account deficits.

Mr Berglof says: "We are certain that the crisis in the west will be a serious one which will last for some time and this means it will definitely have an impact on our countries. We distinguish between two different effects: short-term liquidity problems and more long-term increases in borrowing costs."

"The more important effects will come in the longer term as growth will come down, from very high levels, due to the difficulties and higher costs associated with obtaining credit."

The EBRD chief economist says five countries with high current account deficits have "come under pressure at some point" - Latvia, Hungary, Bulgaria, Romania and Serbia.

But he adds that a greater awareness of risk could bring benefits by slowing credit-fuelled expansions in some states. "Some cooling off may be a good thing for these countries. Their economies, particularly in sectors like real estate and construction, have been growing fast, perhaps too fast, reaching sometimes unsustainable levels."

The World Bank report says the 10 new EU members' preparations for future euro membership, combined with monitoring from Brussels, have put them in a strong position.

But, with the turmoil yet to run its course, emerging economies face risks that credit tightening will weaken growth in developed markets, hitting emerging markets through exports. "There might be a deepening financial crisis and the possibility of a sustained reduction in external finance. This would be most important for those emerging markets with large current account deficits," says the report published this week.

The report names the Baltic states as having the largest external account imbalances, with the banking sector providing the main source of finance. The authors also describe Bulgaria as vulnerable.

Source:  Financial Times