By Boris Groendahl
VIENNA, Dec 18 (Reuters) – Western European banks could still be hit by a further rise in bad debt in emerging Europe if the economic downturn is worse than expected or if currencies decline, the European Central Bank (ECB) warned on Friday.
The ECB said in its half-yearly financial stability report that vulnerabilities eased in the region, which includes the new EU member states as well as Ukraine and others in the former Soviet Union and Croatia or Serbia the former Yugoslavia.
The region suffered a sudden reversal of fortunes this year when a boom driven by western bank loans, exports, investment, and consumer spending slammed to a halt and caused steep contractions in almost every country.
It has been pulled back from the brink by global policymakers’ success in beating back the worst of the financial crisis and restoring liquidity to markets, but the ECB said the situation remained “fragile”.
A general economic deterioration could let the expansion of bad debt pick up again and could unveil some banks’ overexposure to certain countries or sectors, the ECB said.