Euro-Region Debt Crisis Spells Bank Risk in East, EBRD Says
January 25, 2012, 1:16 AM ESTBy Agnes Lovasz
(Updates with EBRD chief economist from fifth paragraph.)
Jan. 24 (Bloomberg) -- An escalating of the euro-region debt crisis would pose a “substantial” risk to the banking industry in eastern Europe, the European Bank for Reconstruction and Development said.
The EBRD revised its 2012 growth forecast for the 29 east European and central Asian nations in which it invests to 3.1 percent from 3.2 percent in October, the London-based development bank said in a report released today. Gross domestic product growth is slowing from about 4.8 percent last year, the EBRD said.
Eastern Europe’s recovery from the 2009 economic slump has been obstructed by Europe’s debt crisis through trade and banking links. Western European lenders, including as UniCredit SpA, Erste Group Bank AG and Societe Generale SA, which control about three-quarters of the region’s banking industry, are selling assets and raising capital to meet more stringent capital and liquidity requirements, curtailing credit to households and businesses in the east.
“While the most recent available GDP and other output measures do not at this point show clear signs of a euro-zone slowdown spreading in the region, financial sector, capital flows and leading indicators paint a gloomier picture,” the EBRD said. “Worryingly for the central Europe and Baltics and southeastern Europe regions, western bank deleveraging appears to be under way since the autumn.”
Western Deleveraging
The EBRD is working with the International Monetary Fund to estimate the extent of the expected deleveraging by western parent banks and pinpoint the most pressing needs, said Erik Berglof, the EBRD’s chief economist at a press conference in London today.
“Keeping the same exposures is not realistic and maybe not even desirable because the model needs to change,” said Berglof. “We need to find out from the private sector what they can contribute to ensure certainty and predictability in an orderly deleveraging.”
To avoid a repeat of the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc., when a sudden stop in capital flows nearly triggered a banking crisis, the EBRD has called on European leaders, regulators and banks in both the west and the east to work more closely together to limit the risks.
The lender has supported reviving the Vienna Initiative, which in 2008-2009 helped avert a region-wide crisis by persuading western banks to roll over funding for their eastern units and inject fresh capital if needed.
‘External Assistance’
The IMF, the EBRD, the World Bank and the European Investment Bank, which spent $42 billion in 2009-10 to help maintain the flow of credit to businesses, should “stand ready to provide external assistance and financial support to banks” in eastern Europe, the Vienna Initiative group of lenders and regulators said in a statement after a meeting in the Austrian capital on Jan. 16.
This time around “it’s not realistic to expect large packages,” Berglof said. “It’s about targeted intervention.” The EBRD has maintained “a crisis response level” of spending for the past three years, he added.
The EBRD last year invested 9 billion euros across the region, nearly doubling its spending from about 5 billion euros ($6.5 billion) in 2008.
Avoid Systemic Problems
“In the deleveraging process some banks will identify their strategic markets and from the non-strategic ones they will withdraw, this is natural,” Piroska Nagy, director of country strategy and policy at the EBRD said in a Jan. 18 interview in Vienna. “Our role together with the home and host regulators and fiscal authorities is to see how that can be managed in a way that does not cause a systemic problem.”
Every country in central Europe, the Baltic economies and all Balkan nations except for Bulgaria had net bank-related cross-border outflows, the EBRD said in the report.
“This suggests that transmission of the euro-zone crisis to the region via bank subsidiaries may have already begun in the fall of 2011, with further negative impact on credit and possibly growth,” the EBRD said.
Credit growth when adjusted for inflation has been “very weak or negative” since late summer in most of central Europe, the Baltic countries and southeastern Europe, the EBRD said. Lending has been the weakest in Croatia, Estonia, Hungary, Slovenia, Bulgaria and Macedonia, the ex-Yugoslav republic, the development bank said.
Capital Outflows
While non-performing loan levels remained high in the region, loan-to-deposit ratios are coming down, signaling a shift to a “healthier” lending model, the EBRD said.
Austria last November told its three biggest banks, which collectively are the largest lenders in eastern Europe, to limit lending in eastern Europe to 1.1 times the funding they can raise locally.
East Europe had net capital outflows in the third quarter of last year, for the first time since the first quarter of 2009, as the deepening euro-region crisis prompted investors to shun riskier emerging markets, the EBRD said. Hungary’s BUX stock Index has lost 13 percent since June, Poland’s WIG-20 Index has declined 17 percent and Turkey’s ISE National 30 Index has dropped 9 percent.
Recession Forecasts
Industrial and confidence indicators have weakened in recent quarters, a sign of “an impending economic slowdown,” the EBRD said.
Slovenia and Hungary are forecast to slide into a recession this year. Hungary’s contraction will be the deepest at 1.5 percent and the Slovenian economy will shrink 1.1 percent, the EBRD said.
The central and Baltic region will expand at a 1.4 percent rate from 3.4 percent last year. Growth in southeastern Europe will be 1 percent, from 2.2 percent last year. Poland will expand 2.3 percent, down from 4.2 percent last year, the EBRD predicted.
Russia and other former Soviet Union countries are most at risk from lower commodity prices triggered by a weaker global economy, the EBRD said.
Under a base-case scenario, growth in Russia “will remain reasonably strong and will support expansion even in the non- commodity exporting countries of the Commonwealth of Independent States, which depend on Russia for exports and remittances,” the EBRD said. Russia will grow 4 percent, from 4.2 percent last year, the EBRD forecast. Ukraine’s expansion will be half last year’s at 2.5 percent, the EBRD said.
The EBRD, owned by 61 countries and two intergovernmental institutions, was created in 1991 to invest in former communist countries to help them transform their economies.
--Editors: Zoe Schneeweiss, Alan Crosby
To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net
To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net
