From Bloomberg

By Agnes Lovasz

East Europe's gross domestic product will shrink 6 percent on average this year, with every economy in the region posting a contraction, Capital Economics Ltd. said.

The Baltic nations of Latvia and Lithuania will show the biggest decline at 15 percent, the London-based research firm forecast in a note published today. Poland, whose government still expects positive growth in 2009, will contract 3 percent, according to Capital Economics.

The global credit crisis has left banks with more than USD 2 T in losses and writedowns and triggered a simultaneous recession in the euro region, the U.S. and Japan. Eastern Europe's economies face their deepest recession since the aftermath of shaking off communist regimes two decades ago.

"Emerging Europe is in turmoil," economists Roger Bootle, Jonathan Loynes and Neil Shearing wrote in the note. "The entire region is likely to enter recession this year, with little prospect of a swift recovery."

Poland, the largest economy in the region, will see a contraction led by a decline in industrial output that will help push the unemployment rate to close to 15 percent, they wrote. Falling tax receipts will widen the fiscal gap to 5 percent of GDP, making the goal of euro adoption in 2012 unlikely as the rules stipulate a deficit of no more than 3 percent, the note added.

Hungary, which needed an International Monetary Fund-led bailout last year, and Romania, which is negotiating external aid, will both shrink 7,5 percent, the research company said. Hungary is "paying a price for past profligacy" and Romania's banking system will come under "huge pressure" as the leu depreciates, the economists wrote. Both governments will have to carry out additional spending cuts to meet conditions for external aid.

Turkey, which started talks on joining the European Union three years ago, will also shrink 7.5 percent, while Ukraine's and Estonia's output will decline by 10 percent, the note said.

Bulgaria, expected to shrink 5 percent this year, is likely to follow its neighbor Romania in applying for an IMF loan as a collapse of exports and inward investment will shrink the money supply, forcing the government to drain its fiscal reserves to restore liquidity, according to Capital Economics. It added that reserves will only cover such needs for six to 12 months.

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