Eastern Europe risks to be dealt a heavy blow as contagion from the euro zone debt crisis spreads, the International Monetary Fund has warned.

"The number one priority would be to see these countries more resilient, more robust," the head of the IMF's European department, Antonio Borges, told a news briefing in Moscow.

Borges called on the region to take strong action to shield itself.

"We're especially focused on financial spillovers because if there are further problems in the financial sector in western Europe that will certainly have repercussions in emerging Europe," said Borges.

The Bulgarian government has been consistently denying that the country has suffered accelerating capital flight and claims there has been no withdrawal of funds from the many subsidiaries of western banks. The central bank has described the funds outflow as "part of the free movement of capital".

Greek banks hold nearly a 30% of the Bulgarian banking market, a 20% share of the bank loans and one-third of all deposits.

Some of the biggest lenders in Bulgaria are managed by Italy's UniCredit, Greece's National Bank of Greece, Hungary's OTP and Austria's Raiffeisen.

Other Greek banks present in Bulgaria include EFG Eurobank, Piraeus, Emporiki and Alpha Bank.

Experts have warned that Bulgaria, the European Union member boasting one of the the bloc's smallest budget deficit, risks seeing its banks sucked under by the fiscal sins of neighboring Greece.

Earlier in the week the International Monetary Fund called on governments in emerging European nations, which according to its definition includes Bulgaria too, to increase fiscal discipline and help banks reduce bad loans to better cope with the euro region’s sovereign-debt crisis.

The IMF predicts the region will grow 4.4 percent this year and 3.4 percent in 2012 as “the global slowdown makes itself felt,” the Washington-based lender said in its Regional Economic Outlook for Europe.

“The region is now caught in the downward trend of advanced countries, and the euro-area turbulence creates significant risks,” the IMF wrote. “Policymakers will need to make headway with addressing the legacies of the 2008-09 crisis, which include large fiscal deficits and high non-performing loan ratios.”

Governments should rein in spending and propose fiscal limits in legislation, the IMF said.

“Fiscal rules can help ensure” budget overruns are “not repeated in future upswings,” it wrote. “Fiscal rules can enhance the credibility of consolidation plans and entrench fiscal discipline.”

The region’s fiscal deficit is projected to decline to less than 2 percent of gross domestic product in 2011 and 2012 from 4.5 percent in 2010 and 6.2 percent in 2009 with “large differences across countries,” the IMF said.

We need your support so Novinite.com can keep delivering news and information about Bulgaria! Thank you!