LONDON- Central, Eastern and Southeastern European banks are set to be hit by a tide of bad loans that may last beyond 2021, a report from the Vienna Initiative grouping of lenders and policymakers said on Wednesday.

Banks were better prepared than during the prior financial crisis in 2008 to deal with the flow of non-performing loans in the wake of the COVID-19 pandemic, the report found.

But it said that how lenders responded in the coming months to pre-empt and prevent a rise in the number of distressed borrowers would be defining.

Created in 2009 after the global financial crisis to prevent large withdrawals by Western banks from emerging Europe, the Vienna Initiative is a coordinated effort by banks, international financial institutions and policymakers credited with averting banking crises in the region after 2008.

A survey carried out by the European Union's lending arm, the European Investment Bank during March, showed nearly 65% of banks polled expected non-performing loans (NPLs) to increase in the coming months, and for 'visibly' fewer new loans to be approved. 

The temporary nature of the social restriction measures means the effects of the current crisis might be more short-lived than during the 2008-09 meltdown, the Vienna Initiative's latest half-yearly report said.

But the initiative said three waves of bad loans could be anticipated, starting with an immediate spike in the fourth quarter as the measures to control the pandemic expire and the frailer borrowers begin defaulting.

A second, slower and more spread-out wave may follow in the first half of 2021, with the intensity of business failures and employment losses highly dependent on how much the economy or markets recovered.

Finally, a third wave may hit, resulting from the knock-on effects of failures in different parts of the economy and supply chains. That is likely to start emerging towards the end of 2021 and beyond, it said.

(Editing by William Maclean) ((Tom.Arnold@thomsonreuters.com; +442075428510; Reuters Messaging: tom.arnold.thomsonreuters.com@reuters.net))