Report says recession in the region will be more severe than elsewhere because of economic imbalances

Eastern European countries have entered a “deep and long economic downturn”, a report by Moody’s Investor Services has warned.

The ratings company said some of Europe’s largest banks could be downgraded because of loans to eastern Europe.

A “continuous downward rating pressure” in the area has led to worsening asset quality and western banks’ reliance on short-term funding, the report said.

The recession in eastern Europe will reportedly be more severe on average given the region’s generally large macroeconomic imbalances, such as fiscal and current account deficits.

Moody’s said the scarcity of international funding would force the deficits to “contract abruptly”, resulting in more significant declines in domestic demand and overall GDP.

The report added the “vulnerability of countries with large external deficits has therefore increased substantially”.

Modern banking systems in eastern Europe have only emerged recently, in the past two decades. They are therefore more vulnerable in times of financial turmoil because they do not maintain the same level of maturity as their western European counterparts.

Around $52bn has been offered in aid to Latvia, Hungary, Serbia and the Ukraine by the International Monetary Fund over the last six months. According to Capital Economics research, these bailouts could extend to Bulgaria, Romania, Lithuania and Estonia.

The MSCI East Europe Financials Index dropped 16% to the lowest in nearly six years following Moody’s report.