Stiglitz: there is a threat of even worst crash than year ago

Apparently in Eastern Europe also banking system is a threat - according to European Bank for Reconstruction and Development Chief Economist Erik Berglof.
Meanwhile Joseph Stiglitz is saying that he is worried about even "worse" crisis because financial institutions (including "too big to fail") remain in bad shape.

Here is eye-opening article from Bloomberg:

Eastern Europe’s recovery remains at risk from a banking crisis as a lack of transparency in the industry undermines confidence and impedes interbank lending, said European Bank for Reconstruction and Development Chief Economist Erik Berglof.

Emerging Europe’s banking system is “not out of the woods” and “there’s still a chance” the region may suffer a financial crisis, Berglof said in a Sept. 10 interview in London.

The development bank, created to support projects in former Soviet and communist states after the end of the cold war, has helped international efforts to limit the impact of the financial crisis on eastern Europe, persuading western banks to stay invested in the region and help fill a funding hole it estimates at $200 billion. Preventing a second banking crisis is “the absolute key” to a recovery in the region, Berglof said.

“There are some signs that demand will go up in western Europe and that will help these countries, but the biggest threat to that is a deterioration of the financial system again,” he said.

Concern that global efforts to repair financial systems may be flagging is mounting.Joseph Stiglitz, the Nobel Prize- winning economist, said in a Sept. 14 interview that in the U.S. and many other countries’ banking systems “the problems are worse than they were in 2007 before the crisis.”

The EBRD has been focusing on 12 Western parent banks that it pinpointed as “systemically important” for the region, including units of Italy’s UniCredit SpAand Societe Generale SA, as well as some large local banks, such as Latvia’s Parex Banka AS and Hungary’s OTP Bank Nyrt.

No Trust

“There are big questions about western European banks’ portfolios and a lot of those uncertainties are tied to investments in eastern Europe,” Berglof said. “When banks don’t trust each other, the interbank market doesn’t work and they are cautious about on-lending to clients. When there are pressures at the center of these banks, it’s typically in the periphery that they withdraw. That’s the same fear that we had in the spring.”

The European Commission warned in June that Latvia’s Swedish lenders, Swedbank AB and SEB AB, may be redeeming debt to their Baltic units, threatening to undermine the effectiveness of the country’s international bailout. The banks denied the claims at the time and the Commission and the International Monetary Fund said yesterday that the lenders had “reaffirmed” their commitment to Latvia in a Sept. 11 meeting.

Stress Tests

Europe’s banks would benefit from more rigorous stress testing with results being made public, Berglof said. That would underpin confidence and encourage interbank lending in the region, he said.

The stress tests should involve “suitable disclosure, recapitalization measures to address the problem of impaired assets and resolution of unviable financial institutions,” the International Monetary Fund said in July.

“The stress testing exercises that are going on inside the European Union - it’s absolutely critical that that information comes out and if there are problems it has to be combined with measures to address those problems,” Berglof said. “That needs to happen in the next couple of months. Any effort made to get greater clarity over western European banks and the parts of these banks that are in eastern Europe, that’s the No.1 priority.”

EU Disagreement

French Finance Minister Christine Lagarde has spoken in favor of publishing stress tests, while emphasizing they need to be standardized across borders to be effective. Her German counterpart Peer Steinbrueck has resisted a push for a harmonized method and is against publishing results. EU bank regulators must conduct confidential stress tests by this month.

The EBRD will probably raise its 2010 growth forecasts for the 30 economies it engages in, when it publishes its regional outlook in October, Berglof said. The EBRD predicted in May the region’s economies will grow at a rate of 1.4 percent next year, after contracting more than 5 percent in 2009.

“We do see some more potential for next year,” said Berglof. “We are more optimistic now than we were. The region is very dependent on what’s happening in western Europe, and the situation seems to have stabilized” there.

Even so, the risk of a protracted crisis in the region’s financial sector is holding back the pace of the potential recovery, he said.

“We are not confident that there will be a very strong, V- type recovery,” said Berglof. “We are thinking in terms of a fragile, drawn out recovery reflecting the problems in the financial system both in western Europe and in eastern Europe. That is putting a lid on our expectation.”