A new banking crunch in the eurozone risks another sharp retreat by western parent banks from vulnerable economies in central and eastern Europe, a process that must be slowed to preserve growth, officials from the region have said.
Rising speculation that Greece will leave the single currency and a mass downgrade of Spanish banks’ credit ratings late on Thursday have intensified fears among local depositors and global investors about the stability of eurozone banks.
Many east European countries outside the euro have banks wholly or largely owned by western counterparts, which have already reduced lending as they try to fix balance sheets damaged by the sovereign debt crisis. They fear another sudden or sharp pullback to home markets could be devastating. “The financial system continues to be vulnerable and the need to deleverage continues to be very strong,” Polish central bank chief Marek Belka told delegates at the annual meeting of the European Bank for Reconstruction and Development. “This deleveraging is potentially more dangerous in countries with a high presence of foreign banks.”
Belka, who chided policymakers from richer economies for their inability to control the crisis, said this reduction of bank lending and debts, or deleveraging, was necessary but that the pace and location of it must be managed carefully. “The crisis mostly is an issue of the developed economies,” he said. “The so-called west has lost its monopoly for wisdom and I’m saying it without Schadenfreude.”
EBRD President Thomas Mirow, who is up against four other candidates on Friday in seeking a second four-year term at the regional development bank, said EBRD-sponsored efforts to slow deleveraging had been critical in the past two years. “What we have seen so far is a managed deleveraging process. We haven’t seen dramatic events so far,” Mirow told reporters. “What we are clearly seeing is that western banks that have engaged in the region without putting CEE (central and eastern Europe) into the focus of their activities tend to retrench and to sell off their assets.”
The EBRD chief expressed particular concern about countries where subsidiaries of Greek banks have played an important role, with Bulgaria, Romania and Serbia seen as most vulnerable. Renewed fears about Europe’s banks present additional challenges for the region’s economies, which are already struggling to grow as the crisis hits their major trading partners in the eurozone.
The EBRD, set up in 1991 to manage the transition of former communist countries to market economies but with a recently-expanded remit to North Africa and the Middle East, predicted a substantial growth slowdown in its monitored economies in 2012. In its latest economic outlook for the whole transition region, which for the first time includes four countries in the Middle East and North Africa, the EBRD forecast expansion of 3.1 per cent in 2012, after 4.6 per cent in 2011. The Bank’s economists see only a modest pick up to 3.7 per cent next year. Although recent data suggests that capital outflows from the region may be levelling off, negative real credit growth and declining exports will continue to impede expansion, it said.
Separately, citing a survey of 12,000 firms in the area, Italian bank Unicredit’s head of CEE & Poland Strategic Planning Fabio Mucci said companies were reporting “tight credit conditions and tighter collateral requirements as an important obstacle to the availability of credit”.
Since the end of last year, eurozone banks have been reducing exposure to central and Eastern Europe with a deleveraging exercise that has squeezed lending even as many countries in the region slide into recession.
Banks from Austria, France, Belgium and other countries control 60-90 percent of the region’s banking assets. The International Monetary Fund says deleveraging could lead to a drop of up to 6 percent of private credit in central and Eastern Europe in 2012 and 2013 in a downside scenario.
Before the crisis, eurozone lenders saw the region as a main profit driver because of faster economic growth and lower credit saturation, but data has shown an outflow of funds from the region since the fourth quarter of last year. The so-called Vienna Initiative to slow the western bank exit from the region in 2009, which was jointly sponsored by the EBRD, the International Monetary Fund, national bank regulators and private lenders, was reprised this year. The EBRD warned on Friday that it expected bank-related outflows to continue from eastern Europe in coming months as western lenders step up efforts to strengthen their balance sheets. The central bank governors of Poland and Hungary also said sales of local subsidiaries by Western banks remain a major concern for policymakers.