Capital and funding pressures stemming from an intensified Eurozone crisis may force the region's banks to cut funding to their units in Emerging Europe, resulting in weaker economic growth in many nations, Fitch Ratings said on Monday.

"Foreign ownership of domestic banking sectors has been a rating strength in Central and Eastern European (CEE) countries, as foreign banks have demonstrated their willingness and ability to support their subsidiaries prior to and through the global financial crisis when required," Michele Napolitano, Associate Director in Fitch's Sovereign team, said in a statement.

"However, a further intensification of financial pressures on eurozone banks raises the risks that they may be less able to do so and, in light of the strong economic and financial links with the region, stress could spread from the eurozone to CEE banks."

The most concrete risk arising from a deepening in the eurozone crisis is a reduction in funding availability from parent banks, which could force the CEE subsidiaries to become increasingly self-sufficient, the rating agency said.

"Although eurozone banks' subsidiaries would be able to sustain some reduction in funding from their parents, they could be forced to cut credit provision and shrink their balance sheets further, with an adverse effect on GDP growth," Fitch said. "CEE countries with lower loan-to-deposit ratios and weaker links with the peripheral eurozone banks would be less affected."

Fitch pointed out that the smooth management by national central banks in the aftermath of the Lehman Brothers collapse helped to underpin depositors' confidence in CEE banking sectors. However, the firm urged central banks and regulators to remain vigilant towards confidence effects from a possible default by a Eurozone member.

"If Western European parent banks were to start to withdraw funding at a rate beyond a controlled level in keeping with demand conditions in CEE economies, or there was a co-ordination problem in that parent banks feared their competitors might be about withdraw funding, then some form of new Vienna Initiative may be required to prevent stresses in Western Europe creating a systemic crisis in Eastern Europe," Fitch said.

The agency noted that banking sectors in Croatia, Bulgaria, Serbia and Romania have the strongest links with banks from Greece and Italy. Meanwhile, foreign ownership is more diversified in Poland, Hungary and Czech Republic. The presence of Portuguese, Irish and Spanish banks is limited across the whole CEE region, it said.

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