Fears of CEE funding crunch grow as euro woes worsen
Clear evidence exists that western banks are cutting lending to central and eastern Europe as they seek to shore up their balance sheets, a central bank governor warned on Thursday
There is clear evidence that private sector eurozone banks are cutting lending to central and eastern Europe as they embark on deleveraging to heal their balance sheets, a central bank governor warned yesterday.
Speaking on the fringes of an EBRD-sponsored meeting, Andras Simor, governor of the Hungarian National Bank, said signs of deleveraging by eurozone banks that were first noted in the autumn of 2011 were now clear to see.
Credit growth is slowing in some CEE countries, he said, adding: There is a fear that asset-side deleveraging is speeding up.
Fears are growing among analysts that deleveraging poses a serious, and even fatal, systemic threat to a region still struggling to recover from the last credit recession, and facing further financial turmoil from the eurozone crisis.
If parent banks withdraw capital to boost capital at home to satisfy the European Banking Authoritys demand to boost tier-1 capital to 9% by the end of next month, emerging Europe will face a steady capital outflow or even a credit crunch.
The regions banking sector is in some places wholly foreign-owned. In Poland, two-thirds is owned by foreign banks; in Slovakia that number is close to 100%.
Mark Allen, the IMFs senior regional representative, said there were signs of deleveraging, and slower lending growth, all over the region. He told Emerging Markets most new lending in Poland came from local, rather than regional banks.
Banks are under a lot of pressure to improve their capital positions, he said. Those countries where the loan-to-deposits ratio is highest are most prone to deleveraging.
Gianni Franco Papa, head of the CEE region at UniCredit, said his bank was curbing consumer finance in the region, but blamed the fall-off in new lending on lack of demand for consumer finance across the region. Rivals, he said, were in a worse position. We have some peers that are deleveraging. But they are leaving more because of problems back home rather than the situation in the CEE region. I do not exclude that some players might decide to leave a country that is considered non-strategic.
Earlier this year the EBRD unveiled an initiative to encourage foreign banks to stay in CEE countries, dubbed Vienna 2.0 after the initial Vienna Initiative in 2009.
Erik Berglof, EBRD chief economist, told Emerging Markets: Vienna 2.0 is about very much strengthening these institutions and getting much better coordination and getting a system thats legitimate in the eyes of host countries.
If we want break this ongoing fragmentation of the European financial system we need to find a way for host authorities to feel comfortable about giving up authority and it is in that spirit that Vienna 2.0 is operating.
Banks are also tackling the looming issue of financial contagion. Santander, which bought Kredyt Bank of Poland from Belgiums KBC Group in February, has opted to ring-fence its sprawling country operations, to prevent any potential contagion in one country spilling over into another.
Jose Antonio Alvarez, its chief financial officer, noted that while the banks Polish operations are forecast to grow by 20% a year, it was deleveraging in two of its core developed markets: Spain and the United Kingdom.
Conditions could get worse as retrenching continues. There is a confidence issue too, Allen said. If there is more financial turbulence in the eurozone that will feed into lower growth in [the] CEE it depresses the animal spirits, even in [stronger] countries like Poland.
There could be a more complex reaction if the CEE subsidiary of one euro-area bank is hit by a bank run. If that happens, people will ask if the [euro-area bank subsidiary] in their country can be trusted. And that might create a bank run in that country, he said.