Bloomberg News

East European Deleveraging Remains Risk, Capital Economics Says

February 17, 2012

Feb. 15 (Bloomberg) -- Eastern European growth is at risk of western European lenders’ asset cuts to meet tighter capital rules even as European Central Bank loans to banks at discount rates eased concern of a squeeze, Capital Economics said.

“There remains a very real threat that euro-zone banks will gradually scale back credit lines to emerging Europe and this could still have a marked impact on growth in a handful of countries -- notably Hungary and the Balkan states,” economists at the London research company said in an e-mailed note today.

The ECB’s longer-term refinancing operation in December improved funding conditions for western European lenders, which control about three-quarters of the banking industry in eastern Europe. European banks must have core capital reserves of 9 percent by the end of June, European Union leaders decided in October. That sparked concern they will meet the goal by withdrawing funding and selling assets in the EU’s east.

The ECB is flooding the banking system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year and funding from U.S. money markets disappeared.

The ECB made available 489 billion euros ($641 billion) of three-year loans at a 1 percent annual interest in December and is planning a second auction on Feb. 29.

Under the most likely scenario, provided that the current improvement in European bank funding conditions persists, deleveraging by western lenders in eastern Europe will be gradual and moderate, Capital Economics said.

Still, 35 billion euros of funding may be withdrawn from eastern Europe, according to Capital. Hungary, Croatia, Bulgaria and Romania would be the most affected, with the pace of economic growth 0.5 percentage point lower and lending growth slowing by 2 percentage points, Capital predicted.

--Editors: Balazs Penz, Andrew Langley

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


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