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Dec. 19 (Bloomberg) -- Eastern European countries may need to tap existing international support packages or request more aid from the International Monetary Fund should capital outflows from western banks in the region deepen.
Countries with no assistance currently in place should negotiate international aid packages to “boost confidence enough to ensure that the bear case does not materialize,” economists Pasquale Diana and Jaroslaw Strzalkowski at Morgan Stanley in London wrote in an e-mailed report today.
Eastern Europe, where western European banks control about 80 percent of the banking industry, risks a financing gap as parent banks are being squeezed by deteriorating loan quality and slowing economic growth. Capital outflows would exacerbate the region’s credit crunch and hurt domestic demand. Parent banks directly lent 139 billion euros ($181 billion) to eastern Europe, Morgan Stanley estimates.
“We look at deleveraging pressures and find that aggressive retrenching, not our base case, by western European banks could leave a funding gap in central and eastern Europe such that most countries except the Czech Republic would probably need to tap existing support packages or negotiate more assistance with the IMF and the European Union,” the report said.
Hungary may need around 12 billion euros in IMF aid “to restore confidence,” it said. Romania’s precautionary credit line of 5.4 billion euros with international lenders “may not be enough under a severe” deleveraging scenario.
“We continue to think there is no case for a ‘big bang’ withdrawal from the region,” the report said. “For the banks in particular, we think that the IMF, European Commission involvement in any given country in central eastern Europe would be particularly encouraging.”
Austrian regulators restricted new lending to 1.1 times the deposits and wholesale funding that the eastern European units of Raiffeisen, Erste Group Bank AG, and UniCredit SpA’s Bank Austria AG are able to raise on their own, Austrian regulators said on Nov. 21. This would limit their ability to fund credit growth with loans from the parent company.
Erste, Raiffeisen and other Austrian banks collectively are the biggest lenders in eastern Europe, having loaned $266 billion as of June, according to the Bank for International Settlements. That number doesn’t include Bank Austria, whose lending is attributed to Italy by the BIS.
--Editors: Alan Crosby, Douglas Lytle
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