East Europe Policy Makers Said to Meet on Credit Concerns
January 25, 2012, 7:57 AM ESTBy Boris Groendahl and Zoe Schneeweiss
(Updates with comments from EBRD in fifth paragraph, economist in 20th.)
Jan. 13 (Bloomberg) -- European regulators and financiers will meet next week to seek ways to prevent western Europe’s banking woes from causing a credit crunch in the continent’s east, said four people familiar with the agenda.
The Jan. 16 meeting in Vienna, hosted by the Austrian finance ministry, will bring together senior officials from the International Monetary Fund, the European Union, the European Central Bank, the European Bank for Reconstruction and Development and the World Bank, said the people, who declined to be identified because the meeting isn’t public. They will meet regulators from the former Communist part of Europe and from western European countries whose banks dominate the region, including Austria, Italy, France, Belgium and Germany.
Regulators and policy makers are trying to shield economic growth in eastern Europe as western lenders curtail credit, the people said. Some cuts will be inevitable because there is pressure on the banks to shed assets to improve capital ratios and cut the amount of liquidity they pass on to their subsidiaries, they said.
The measures that will be discussed may include quotas to limit asset reductions and ways for international lenders like the IMF and the EBRD to support lending by providing capital, liquidity or other instruments, said the people. Additional meetings will be needed to produce concrete results, they said.
‘High Risks’
“These new capital requirements have to be implemented cautiously,” EBRD President Thomas Mirow said in a speech in Vallendar, Germany, today. “The risks of accelerated deleveraging and of increasing home bias are high. No region would be more vulnerable to this than emerging Europe, with its deep banking linkages to western Europe.”
Eastern Europe’s biggest lenders need to raise capital ratios to meet requirements by the European Banking Authority, which requires core capital reserves of 9 percent after writing down holdings of sovereign debt by June 30.
That may require the equivalent of 115 billion euros ($147 billion) of capital, according to the EBA. Banks are raising their ratios at least partly by reducing assets.
Italy’s UniCredit SpA, the largest lender in eastern Europe by assets, needs 7.97 billion euros of fresh capital, according to the EBA while Erste Group Bank AG, the region’s second- biggest, requires 743 million euros.
Raiffeisen Bank International AG, the third biggest, has a 2.1 billion-euro shortfall. Societe Generale SA, KBC Groep NV and Intesa Sanpaolo SpA are next in the ranking of eastern European banks.
East Europe Boom
In addition to the EBA demands, Austria told its three biggest banks to limit new lending in eastern Europe to 1.1 times the amount they can raise locally, rather than pass on liquidity to subsidiaries, as they did in the past. It also requires a capital surcharge of as much as 3 percentage points.
The lenders, which bankrolled eastern Europe’s boom before the 2008 credit crunch, are already squeezed by deteriorating loan quality and slowing economic growth.
The region was the world’s worst-hit in the aftermath of the collapse of Lehman Brothers Holdings Inc. three years ago and faces the threat of the same fate as the euro area’s troubles spread.
Slowing Growth
Eastern Europe’s economic growth is slowing, tracking euro countries that buy the bulk of the region’s exports. The IMF cut its 2011 growth estimate the most for the region, along with the U.S., in its World Economic Outlook last year.
Central and eastern Europe’s economies contracted by 3.6 percent in 2009 before rebounding 4.5 percent in 2010 and 4.3 percent in 2011, according to the IMF, which in September predicted growth will slow to 2.7 percent this year.
Funding from western lenders added 1.5 percentage points to annual gross domestic product growth from 2003 to 2008 in eastern Europe, according to the IMF. Lending in the region probably weakened in the second half of last year in the 29 countries monitored by the EBRD, the lender said last year.
“Deleveraging is doubtless unavoidable, but will need to be measured and balanced,” EBRD’s Mirow said.
The most important providers of credit are Austrian banks, which collectively lent $266 billion to eastern European households, companies and governments, according to the Bank for International Settlements.
‘Vienna Initiative’
Their engagement prompted Austrian banks, together with their finance ministry and central bank, to start a group dubbed the “Vienna Initiative” in 2009.
The group, which consists of western banks active in the region and the official bodies that are meeting in Vienna next week, helped stabilize the region in 2009. That was achieved by a collective commitment by the banks not to reduce their lending in the region and by the international lenders to help with funding.
The banks, which are not participating in next week’s meeting, won’t be as easily convinced this time to keep their lending unchanged, because the pressure on them is coming from regulators themselves, said Peter Attard Montalto, an economist at Nomura Holdings, Inc.
The IMF and the other institutions “had a reasonable argument in 2009 but that simply doesn’t work now,” he said. “Equally I think there is less panic among the banks in some sense, and hence less inclination to coordinate.”
Fitch Ratings yesterday downgraded four foreign-owned Hungarian banks, saying it expects them to get less funding from their western European parents.
“Fitch expects the parent institutions to retain their presence in the Hungarian market, although they are likely to more tightly ration capital and funding given the weak outlook for the sector,” Fitch said in a statement.
--With assistance from Irina Savu in Bucharest. Editors: Balazs Penz, Paul Abelsky
To contact the reporters on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net; Zoe Schneeweiss in Vienna at zschneeweiss@bloomberg.net
To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net
