The European Bank for Reconstruction and Development (EBRD) has slashed growth outlook on Eastern Europe saying that the exposure to the Eurozone financial crisis will negatively affect lending because parent banks in the west will continue to deleverage in those markets.

“While the direct negative impact of the Eurozone crisis on growth in the region through overall capital outflows may have receded, its effect on lending through cross-border bank deleveraging seems to continue,” says EBRD in it Regional Economic Prospects publication published today.

EBRD says that capital outflows, deleveraging, and lack of cross-border finance and fragmentation of European financial markets are all adversely impacting Eastern Europe.

As a result, EBRD has slashed growth outlook for 2012 for all of Eastern Europe with an exception of Croatia, Hungary and Slovenia saying that these countries will have negative growth.

EBRD bases these projections on a baseline scenario for the EU in which it sees chronic crisis of “muddling through” but one that is worrisome.

“The Eurozone crisis poses further downside risks to the outlook, as any worsening beyond the baseline assumptions could have serious negative consequences for growth across the entire transition region,” EBRD says.

It warns that worsening of a sovereign could render “several large European banks insolvent” which would accelerate deleveraging “triggering a credit crunch and recession in emerging Europe.”

EBRD assign lower likelihood to any EU turnaround but ‘Even then, the fiscal contractions and credit reductions that have already occurred will present a significant drag on growth, and its performance in 2012″.

Available here.