CEE banks at risk from fresh euro crisis
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Emerging Markets

CEE banks at risk from fresh euro crisis

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A Greek default would pose significant risks for eastern European economies, but mechanisms set up in the wake of the global financial crisis should be sufficient to guard against the potential fallout, experts have said

An escalation of the eurozone debt crisis would pose grave risks for eastern European economies, but existing crisis-prevention mechanisms are sufficiently robust to guard against the likely fallout, experts have warned.

Erik Berglof, chief economist at the EBRD, told Emerging Markets: “Certainly anyone who watches what’s going on in western Europe [and] in the eurozone right now has to be concerned.

“The main scenario is that [eurozone crisis resolution] goes smoothly but we cannot rule out that there will be hiccups,” he said. “Compared to last year, it’s the same concerns maybe even amplified, and the concern that there could be major disruption is certainly something to bear in mind.”

Chief among the concerns is the potential for disruption to the region’s banking sector should Greece default on all or part of its debt repayments, resulting in a severe hit for Western European banks, as parent banks may look to withdraw liquidity from subsidiaries in emerging Europe.

Mark Allen, senior regional representative for Central and Eastern Europe at the IMF said that the close integration of eastern Europe’s financial systems with those of the west left the former vulnerable to shocks.

“Although Eastern European countries have shown that they have quite a bit of ability to prevent spillovers from the problems of parent banks into the region, if the problems of the parent were that much more severe, then we could see extra problems for the region.”

If an escalation of the crisis leads to a slowdown in Germany, the impact will be felt beyond the banking sector and hit economic growth across many export-dependent nations in central and eastern Europe, Allen said. But he noted this was not his base-case scenario.

The EBRD believes that the creation of the Vienna Initiative is evidence that sufficient frameworks should be in place to limit any potential fallout.

Under the 2009 initiative, policymakers, multilaterals and commercial banks guaranteed that parent banks in Western Europe would not withdraw liquidity from subsidiaries in Eastern Europe.

“The Vienna Initiative worked at a time when there was no funding,” Piroska Nagy, one of the leading architects of the Initiative, told Emerging Markets.

“We managed in the height of the global crisis when the rest of the world was reeling ... so [a crisis] this time around should be managed too.”

Even if a potential crisis requires different policy response, the Vienna Initiative has created the framework for the cooperation required to deal with such a scenario, Allen said.

“The legacy is that we have a framework that we can utilize if we have further strains, no matter where they originate from, for dealing with the linkages between western Europe and CEE banking systems. That’s important,” he said.

“The initiative has been very useful in ensuring that the interests of [central and eastern Europe] are borne in mind when bigger fish are frying.”

EBRD president Thomas Mirow told Emerging Markets the region is “very closely linked to Germany in terms of manufacturing profit.” But he warned: “Should there be another cycle in which Germany would face more problems, then they would be affected.”

But in contrast to the generally sanguine outlook among EBRD and IMF officials in Astana this week, many external experts warn that the impact of a Greek default could be catastrophic for the European economy.

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