Eastern Europe remains at risk of a credit squeeze as western lenders cut funds to meet capital rules even after the European Central Bank's discount loans, the European Bank for Reconstruction and Development said.

While the ECB's EUR 489 B of three-year loans have helped avoid "a major disaster," growth is slowing and credit remains scarce, Piroska Nagy, an EBRD economist, told Bloomberg.

"We aren't getting into a euphoric mood about the ECB's measures," Nagy, director of country strategy and policy at the EBRD in London, said in a phone interview.

"We are very happy that finally the ECB did what a central bank is supposed to do. But because of the growth developments, the capital-flow developments and the trade-finance developments, we are very cautious to claim that we are out of the danger zone."

Funding conditions are still deteriorating in central Europe, the Baltic economies and the Balkan nations, while Poland appears to be more insulated because of stronger economic growth and increasing local deposits, according to a draft report by the EBRD, seen by Bloomberg.

Bank-related capital outflows from emerging Europe were "substantial" in the second part of last year, the EBRD said.

The comments come amid renewed fears of a bank drain in the subsidiaries in Eastern Europe, including Bulgaria.

Foreign banks are pulling funds from their subsidiaries in Bulgaria as lending growth in the country stalls, shows preliminary data of BIS, the central bank of central banks, as cited by local media.

The total exposure of foreign banks to Bulgaria totaled USD 2.3 B during the third qurater of last year and about half of it - USD 1 B - was withdrawn by Greek banks, Sega daily reported earlier this month, citing preliminary data from the Bank for International Settlements (BIS).

Greek financial institutions have pulled out from Bulgaria over USD 1.8 B for half а year, reducing their funds in Bulgarian subsidiaries down to USD 14.2 B at the end of September, the daily claims, citing data from the second and third quarters of last year.

With large parts of Bulgaria's banking sector in Greek hands, the daily voices concerns that local subsidiaries can be drained of money, putting the country's economies at risk.

Meanwhile Bulgaria's bank system reported a 5.7% decrease in profits in December to BGN 586 M from the same period a year ago.

Total assets rose 4.2% in 2011 to BGN 76.8 B, according to central bank data. Bad loans edged up to 14.93% in December in comparison with the same period a year ago.

Half a month ago EBRD chief economist Erik Berglof started to drum support for a new Vienna Initiative in a bid to stop an outflow of capital from emerging Europe.

"What I took away from this meeting was a remarkable consensus," Erik Berglof, chief economist of the European Bank for Reconstruction and Development, said at a Euromoney conference in Vienna on Tuesday.

"Now it's to sit down and work out the details together with the private sector."

Berglof warned that west European countries' scramble to protect themselves from the debt crisis while banks shrink their balance sheets risked a double blow to the region.

He said he hopes to contain the urge of many banks to sell or reduce assets to hit the new capital adequacy targets.

"We shouldn't have same expectations in terms of exposure commitment that we had (in 2009). There is an adjustment that needs to happen. We just have to make sure it happens in a more managed, gradual way. That is my hope."

The EBRD and other agencies have also been working with emerging economies on the outskirts of Europe, such as Bulgaria, Romania, and Serbia, which are most at risk of a slow-down in the wake of Greece's financial crisis.

Greek banks hold nearly a 30% of the Bulgarian banking market, a 20% share of the bank loans and one-third of all deposits.

Some of the biggest lenders in Bulgaria are managed by Italy's UniCredit, Greece's National Bank of Greece, Hungary's OTP and Austria's Raiffeisen.

Other Greek banks present in Bulgaria include EFG Eurobank, Piraeus, Emporiki and Alpha Bank.

Experts have warned that Bulgaria, the European Union member boasting one of the the bloc's smallest budget deficit, risks seeing its banks sucked under by the fiscal sins of neighboring Greece.

Bulgaria's central bank and finance minister however have repeatedly tried to assuage fears over funds outflow from Greek bank subsidiaries in the country to headquarters in Greece, saying this is part of the free movement of capital.