Capital Economics: Romania and other East European countries will report economic drops in 2010

Capital Economics, a consulting and macroeconomic company expects Romania, Hungary, Bulgaria and the Baltic States to register GDP contractions in 2010 for the second year, because of the fragile banking sectors.

There is a real risk of developing a vicious circle in the Baltic states, the Balkans and Hungary, where the slow economic recovery limits the banks' capacity to credit and this has a negative impact on economic recovery, analysts Neil Shearing and David Oxley from Capital Economics said in research note.

They expect the economies of Romania, Hungary, Bulgaria, Latvia, Lithuania and Estonia to drop in 2010 and the perspective of the banking industry will remain difficult. In Poland, Turkey and Czech Republic, the "healthy" financial system will support economic recovery, according to Bloomberg. In countries with fragile financial sectors, the failure of banks to transfer the reduction of monetary policy interest rates to their clients affects the increase of credits, the analysts said.
Capital economics estimated in September 2009 that Romania's economy will contract by 0.5% in 2010 because of growing unemployment and outperforming loans and the reduction of government expenses.