• Euro area banks' losses on loans in Central and Eastern Europe (CEE) will be substantial due to an unfortunate mix of collapsing property prices, economic downturn and exchange rate depreciation.
• Austria is by far the most exposed country, but the government can afford to absorb the losses. Belgium, which is a high debt country with a fiscal budget that's already stretched, is in for smaller losses, but they also have less room for manoeuvre.
• We look at three risk scenarios. A mild scenario, which is comparable to the Swedish banking crisis; a hard scenario, where the hardest hit CEE countries face more substantial looses; and finally an ugly scenario which is more comparable to the Asian crisis. In these scenarios Austrian banks face losses of 3½-11% of GDP, Swedish banks loose 2-6% of GDP and Belgian banks loose1-3½% of GDP.
• Governments in the euro area will not be eager to provide rescue packages aimed at supporting lending in the CEE region. The CEE governments will be much more willing to provide rescue packages or direct loans, but they are less able and will need support from international institutions.
