Financial history is littered with examples of lamentable international cooperation, stretching from the collapse of Lehman Brothers back through to the Great Depression. So when the world’s leading institutions come together in seeming harmony to prevent the meltdown of an entire region – and succeed – it’s worth both generous applause and closer inspection.
When the European Bank Coordination Initiative – also known as the Vienna Initiative – was launched in January 2009, it was more than a fiscal promissory note to the troubled nations of central and eastern Europe.
A key aspect of that plan was a coordinated effort to weave together the best efforts of the private sector and leading international financial institutions. That wedded the management and drive of major regional banks, notably Vienna-based Raiffeisen Zentralbank and Erste Bank, to the long-term procedural and strategic capabilities of the World Bank, IMF, EBRD and European Investment Bank (EIB).
The institutions backing the Vienna Initiative pledged E24.5 billion in new funding to a region threatened by a systemic outflow of capital, notably by troubled global and European lenders seeking to shore up capital at home.
That process introduced specialist distressed debt managers to help clean up sovereign balance sheets in the likes of the Ukraine, Georgia, the Balkans and the Baltic region. And it injected capital directly into deeply troubled regional banking sectors. The International Financial Corporation (IFC) has alone pumped $200 million into Georgia’s leading lenders, mobilizing a further $330 million in support from other international financial institutions.
But most of all, the Vienna Initiative introduced the world – and even long-in-the-tooth legislators – to a novel experience: genuine, workable and even prescient global cooperation, at a critical point in economic history.
“To my knowledge, this was the first time the big international financial institutions have all worked together in such a coordinated way,” says Jyrki Koskelo, vice-president of global industries at IFC. “Basically we all created a platform where everyone can talk – I have never seen anything like it. It was a multiple effort by multiple countries and multiple institutions.”
Herbert Stepic, chief executive officer at Raiffeissen – a man widely credited with helping to kick-start the Vienna Initiative in November 2008, at the height of the global banking crisis – tells Emerging Markets: “The key reason why the Vienna Initiative was so successful lies in the fact that all of its participants shared a common interest, namely ensuring sufficient liquidity in the region’s banking markets.”
The Vienna Initiative early on provided various CEE-focused institutions with a platform on which to share ideas, and to contrast regional troubles with the wider global crisis. “This was important,” says Stepic, “as some stakeholders were initially focused only on their own most immediate concerns and failed to grasp important inter-linkages.”
As with any successful team project, each of the main players focused on their specific skill set. The EIB, widely seen as the cornerstone of the project, extended most of the longer-term loans. The EBRD was deployed to boost tier-two banking capital and bolster regional trade. And the World Bank and the IMF provided, respectively, longer-term and shorter-term support to local banks and governments.
Of the E24.5 billion in pledged funding by end-2010, E19.3 billion had been made available by the end of 2009: E10.8 billion from the EIB, E4 billion from the purse of the EBRD and E4.5 billion from the World Bank group.
If the Vienna Initiative is a concerted plan toward regional financial coherence, its initial stages have gone remarkably smoothly. CEE nations are crawling out of recession, joining those (notably Poland) which rarely looked rattled by the global crisis.
Key to the revival process has been the latent realization that no one – not global banks, international financial institutions or multinational corporations, nor even powerful regional lenders – can simply place all CEE nations in one basket. This is not the 1990s: Poland and the Czech Republic are at a vastly different stage in their development to the likes of Romania and Albania, just as the Balkans and the Baltics have little in common.
“The Vienna Initiative was an important step toward a better understanding that one can’t put all countries in the region in one pot,” Andreas Treichl, chief executive and chairman of the managing board at Erste Bank tells Emerging Markets. “Most of the people who made comments on the region had no clue what was going on. Some even thought that Kazakhstan was neighbouring Austria. This has changed thanks to the initiative.”
Raiffeisen’s Stepic says: “One important lesson that the crisis has taught us is that we should look at the economies in central and eastern Europe on an individual basis, as opposed to making all-too-broad generalizations about the region as a whole.”
NEXT STEPS
But the next phase is going to prove markedly tougher then the first. Central and eastern Europe did not collapse financially in early 2009, the toppling of individual dominoes in Latvia and Ukraine failing to spark a more systemic regional collapse. Many global lenders and investors pulled back from the region sharply, but others did so in moderation, and many more remained behind to man the ship.
Willem Buiter, chief economist at Citi, tells Emerging Markets: “We need the Vienna Initiative on steroids for quite a few years to come until the banks in continental Europe are finally properly recapitalized and viable institutions again rather than the rather dodgy and wonky banks that we have at the moment. Even if there is trouble for the parents in Germany, France, Austria, the Netherlands and Belgium, it should not be visited upon the children.”
More remains to be done. Institutional capital has shored up local balance sheets, but that doesn’t mean that lenders are committing capital to local projects and businesses. In fact, the reverse is true.
“There is very slow credit growth in Kazakhstan, Georgia and other countries, including some in central Europe,” says Piroska Nagy, a senior adviser at the office of the chief economist at the EBRD and an individual closely associated with every step of the Vienna Initiative. “There is a very high risk perception in that region. Risk is high and demand for lending is not strong.
“There is a lag in the credit response to the economic rebound,” she says. “And this – credit lagging behind the recovery – is not totally unusual. There has to be some improvement in the general economic picture for bankers to feel able to lend.”
Others believe that the capital does exist – but that banks remain either loathe to lend, or underwhelmed by the quality of available borrowers. “Banks are very liquid in eastern Europe at the moment,” says the IFC’s Koskelo. “After we convinced everyone not to pull out of CEE countries, local lenders just ended up here with a whole lot of capital on hand.”
Then there is the broader and far simpler fact that, post-economic crisis, we live in financially straightened times. Banks that overextended themselves in the good years have less internal capital and – like it or not – a diminished desire to lend to a relatively slow growing region like the CEE.
“Both banks and investors have understandably taken a far stricter approach to the issue of risk in the wake of the economic crisis,” says Raiffeisen’s Stepic. “So although both risk premiums and currencies in CEE have stabilized over the past year, lending volumes remain low.” He says regional states could do more to boost domestic savings, aided by local lenders creating attractive and innovative new financial products.
Another looming threat – in the CEE and elsewhere – is that of rising distressed debt levels. Non-performing loans (NPLs) are set to jump as lenders absorb a mass of defaults caused in equal measure by 10 years of steady and sometimes wild lending growth, and a further two years of severe economic crisis.
WORDS OF CAUTION
In its latest Global Financial Stability Report, released this April, the IMF says NPLs had “increased substantially” throughout CEE since the onset of the global financial crisis. Its predictions were bleak: that failed loans as a percentage of total lending would remain uncomfortably high until at least 2014, notably in the Baltic region, Russia including the CIS, and south-eastern Europe including the Balkans.
The fund says: “Our projections suggest that bank asset quality will improve only gradually in 2011 for most CEE countries, even if GDP growth recovers during 2010. And in the event of a further splintered crisis such as a double-dip recession, NPL ratios “would increase by around one-third during 2010 in all sub-regions except the CIS, and would remain elevated in 2011”.
Leading regional bankers are reasonably optimistic. Erste Bank’s Treichl says that while NPLs “doubled or tripled” over the last few quarters, the market, he hopes, has “seen the worst”.
Raiffeisen’s Stepic again highlights the financial diversity of a region in which robust Poland can neighbour tattered states like Ukraine and the Baltics. But he insists that overall failed loan ratios are trending downward throughout the region. “While NPL volumes are expected to continue to grow through 2010, the rate at which they do so is likely to be noticeably below the very steep NPL growth rates that the CEE posted in 2009,” he says.
So having staved off – for now – the worst of the financial crisis, many are raising some pressing but as yet unanswered questions. Does the region’s banking model need to change in the light of our straightened times? And what lessons, if any, have CEE states learned from the financial crisis?
The banking model throws up sharply divergent opinions. Asked if the CEE’s banking model should be tweaked or even built anew, Erste Bank’s Treichl scotches the notion. “Not at all!” he says. “It is a banking model that focuses on retail banking. And this has proven to be very resilient to the economic downturn we have experienced.”
Raiffeisen’s Stepic isn’t so sure. He believes that the crisis brought to an end an era in which the CEE’s banking markets “could rely on comparatively cheap financing” from abroad. “Future growth in the markets – including in loan volumes – will largely depend on how successful these attempts to promote domestic savings are,” he says.
LESSONS LEARNED
And the lessons learned? Again they are both manifold yet basic. First, CEE states need to develop local capital markets and boost savings rates, as well as drawing up rules that encourage local lenders to create financial products that aid and encourage this process.
Regional states must also learn to balance the books. Those nations that borrowed most heavily from overseas were those most heavily battered by the financial winds that tore across the world in late 2008 and 2009.
Finally, the CEE and its people need to understand that they can’t have everything they want today. No one can, least of all the inhabitants of a relatively slow-growing region that has, in most sovereign cases, struggled to define itself in the post-Soviet era. “Some people in the CEE were trying to grow too fast, and trying to enjoy tomorrow’s fruits today,” says the IFC’s Koskelo.
Yet for all of these relative negatives, and the pain involved in extricating an entire region from a lingering fiscal and economic downturn, the past 18 months have been surprisingly revelatory for central and eastern Europe.
A few lone sovereign defaults did not spell doom for everyone. Distressed debt is rising and credit growth is understandably still way down on pre-crisis levels, but a new sense of financial reality is at last permeating a region that looks ready to stand on its own feet.
Moreover, the CEE region played host to that rarest example of them all: global institutions tearing up the rule book, discarding their own vested interests, and working together to the benefit of all. By any measure, the Vienna Initiative has been a resounding success – its ability to corral institutional capability and wed private- and public-sector capital unheard of in peacetime.
“We learned that if we see problems looming, and so long as we all work together, we can minimize damage and not just within our own silos,” says Koskelo.
Stepic says: “A final lesson is one that the Vienna Initiative has taught us: there is lots to be gained through cooperation that extends beyond borders and includes stakeholders from both the public and private sectors.
“Most of the region’s economies are back on the path to recovery,” he says, “and those aspects that propelled its long-term growth perspectives – strong productivity growth rates, high levels of education, and competitive tax regimes – remain as valid as ever.”