Western bank retreat clouds emerging Europe's recovery -IMF

By Marcin Goettig and Marcin Goclowski

WARSAW (Reuters) - Emerging Europe's economies are recovering, but the high growth of the past is unlikely to return soon as western banks that once flooded the region with capital focus on their home markets, an IMF official said.

James Roaf, the International Monetary Fund representative for central and eastern Europe, said there was a risk the banks could accelerate the withdrawal of capital, especially from the region's weaker economies, threatening the nascent rebound.

"We see almost all the countries in the region having stronger growth next year," Roaf told Reuters in an interview.

However, "the general theme is a recovery to a slower growth rate than before ... , with significant vulnerabilities."

The Fund would present a report on that process on Oct 17.

Central and eastern Europe enjoyed strong growth for years before the global financial crisis erupted in late 2008, and the region incorporates a diverse mix of economies.

They include powerhouse Poland and more vulnerable countries like Serbia - which announced an austerity plan on Tuesday as it eyes a deal with the IMF - and euro zone state Slovenia, which may need aid from the bloc to rescue its domestic banks.

Western lenders, dominant players in the region's financial sector, used to provide plentiful capital and financing that propelled growth.

But faced with pressure from within the euro zone to boost their capital positions, many have been pulling back from emerging Europe, and they accelerated that withdrawal in the first quarter.

"Deleveraging is continuing and there is a risk that it could accelerate again," Roaf said, adding that countries in south east Europe were most at risk.

Serbia laid out painful spending cuts on Tuesday, as it looks to a deal with the Fund early next year to reassure investors and cut borrowing costs.

Roaf said the IMF was "ready to support (Serbia)... in any way that suits".

HIGHER FORECAST FOR POLAND

On Poland, the region's biggest economy, Roaf said the IMF would soon raise its 2014 economic growth forecast to about 2.5 percent from 2.2 percent now as investment was picking up and exports had been doing well.

But the new forecast would already be close to the potential growth rate at which Poland's economy can expand without creating imbalances.

This is much lower than the 4-5 percent registered before 2008 and unlikely to be enough to bring down the 13 percent unemployment rate, denting 37-million-strong nation's aspiration to quickly close the wealth gap with its Western counterparts.

The IMF official said structural reforms to make the business environment more investment-friendly could help speed up growth, but this was something countries had to work on.

The slower potential growth rates across the region were mainly a result of slower growth in western Europe and sharply reduced investment flows.

"Slower growth points to more problems with employment going forward. Also fiscal problems", Roaf said.

In an effort to reduce its debt and close a budget gap, Poland is transferring to the state a large portion of the assets held by state-guaranteed private pension funds.

Roaf said the overhaul, which provoked protests from some leading economists and players in the market, did not undermine the sustainability of public finances.

"We are not taking a position whether this is the right thing to do or not. But we certainly do not see a concern," he said.

Roaf said that if external risks subsided, the IMF's current $34 billion Flexible Credit Line (FCL) for Poland could be curbed or not extended at all when it expires early 2015.

Warsaw has not used the FCL, but keeps it as an insurance against a rapid withdrawal of foreign capital, which allows it to enjoy lower borrowing costs.

(Writing by Marcin Goettig; Editing by John Stonestreet)