VIENNA INITIATIVE: One good turn
Concerns about widespread bank deleveraging have given rise to ‘Vienna 2.0’ – the second plan in three years to try to mitigate the ill effects of drying credit to eastern Europe. But this time around, the initiative has met with far less enthusiasm
When regulators and bankers convened in the Austrian capital in January, the expectation was palpable. A similar meeting at the height of the financial crisis had spawned the Vienna Initiative (VI), a E24.5 billion package of credit lines and development policy loans that prevented central and eastern Europes (CEE) flimsy banking sector from folding like a deck of cards.
Much was thus expected of this years conclave dubbed Vienna 2.0 and for good reason. The eurozone crisis, then several months old, was forcing banks in western Europe, already under pressure to boost tier 1 capital to 9% by end-June, to make a stark choice.
Would they rein in lending to their central European subsidiaries in order to focus on their home markets? And if they did, what would happen to those emerging European economies most of the land east of Vienna and west of the Urals so dependant for so long on funding from western European lenders? Were they doomed, or just slightly jiggered?
Five months on, answers to these questions remain elusive. No one seems sure who is pulling in which direction; some Vienna participants, particularly the banks that continue to prop up emerging Europe, seem unclear as to whether they should be involved at all.
Whats clear is that despite protestations to the contrary, most lenders with a major CEE presence notably the Austrian triumvirate of Raiffeisen Bank International (RBI), Erste Bank and Bank Austria, as well as Frances Société Générale and Belgiums KBC Bank are slowly but surely reducing their exposure to the region or, at the very least, capping their local funding commitments.
Banks face the need to deleverage to support their home markets, says Piroska Nagy, director for country strategy and policy at the EBRD and a principal architect of the original Vienna Initiative and its successor.
Edward Strawderman, associate director, financial markets, Europe and central Asia, at the International Finance Corporation (IFC) adds: This time around, people understand there is going to be a deleveraging by western banks. The point is ensuring that its not a messy deleveraging.
That retrenching process is already under way. Polands central bank governor, Marek Belka, has warned that most new lending in his country already comes from Polish-owned banks worrying times for a financial sector two-thirds controlled by foreign institutions. Both RBI and Erste Bank have written down assets in Hungary, Romania and the Ukraine, with Erste shocking investors by posting a E700 million loss in 2011.
Some markets seem particularly vulnerable, notably Romania and Hungary, both now in full recession, along with Bulgaria, Serbia and Croatia nations dependant on funding from Greeks embattled lenders, all of whom are retreating to their equally troubled homeland.
Even the markets bigger players are growing frustrated over key markets. RBI, which generated 82% of its profits from emerging European markets in 2011, remains strongly focused on CEE, particularly Russia and Poland, its chief financial officer, Martin Grüll, tells Emerging Markets.
Other markets are far less rosy. RBI saw losses at its Hungary division widen in 2011, and Grüll and others have been less than enamoured by Budapests plan to raise nearly $600 million from a new financial transaction levy (FTL) from January 2013, paid for entirely by local and foreign banks. There have been some very surprising moves by the Hungarian government, and its the only country where I would put a question mark over the constant uncertainty, notes Grüll.
Deleveraging by troubled western lenders Unicredit/Bank Austria and Société Générale creates opportunities even while it threatens the established order. Russias state-controlled lender Sberbanks E505 million acquisition of Volksbank International, the CEE subsidiary of Austrias Oesterreichische Volksbanken, opened the door to Moscows expansion into the region.
Sberbanks plans to pump E300 million into the banks operations in Poland and the Czech Republic are welcome in a region under severe pressure.His deputy chairman has said the bank is committed to CEE expansion.
Sberbank is not alone in eyeing up regional opportunities. Rival Russian banks along with lenders from the Gulf and Asia have been nosing around. Qatar National Bank, insiders say, is keen to buy financial assets in the region, as are Beijing-based lenders Bank of China and Industrial and Commercial Bank of China. There are lots of attractive opportunities out there, says IFCs Strawderman. The only issue is when, or if, western European banks are willing to sell.
Two of the more curious aspects of the regions banking sector show how much life has changed in recent years and yet how much it has stayed the same. The original VI talks in early 2009 highlighted how dependent the region was on external funding.
Nagy notes just three places in the world where foreigners control the banking sector: Mexico, where US banks predominate; New Zealand, dominated by Australian lenders; and central and eastern Europe. No lender from, say, Prague or Warsaw has managed to replicate RBIs or Erste Banks success over the past two decades and the CEE region is the poorer for it.
In other ways, the region has changed beyond all recognition. During the 2009 talks, governments across emerging Europe were castigated for their inability to build and preserve local savings pools.
If western European banks withdrew funding, warned officials from leading international financial institutions (IFIs), notably the EBRD, World Bank and European Investment Bank (EIB), the major financial and collaborative players in the original Vienna Initiative, there would be little or no local capital available to fund the growth of local banks or replacement foreign banks.
That situation, remarkably, has changed for the better. Unlike their finger-wagging western neighbours, many emerging European nations have reacted well to adversity and austerity. Local retail and institutional investors are saving more, with the result that major European lenders are better proportionally capitalized in Poland and Russia than they are at group level.
Yet despite this, the region remains vulnerable not to its own inadequacies, but to the ongoing crisis to the west. The source of emerging Europes problems clearly emanates from the eurozone, including the difficult situation of [western] banks, says the EBRDs Nagy.
Neil Shearing, chief emerging markets economist at London-based Capital Economics, describes the eurozone as the biggest current and future threat to the CEE region. If the European Central Bank cant contain the contagion in western Europe, all bets would be off as the financial crisis spreads east. Theres only very little that the VI could do to prevent collateral damage in the CEE.
This looming danger should have raised the profile of Vienna 2.0 to a must-see, must-hear event. But it hasnt. On a financial level, Januarys talks didnt bring anything new to the table: Shearing notes that with the IFIs spending E24.5 billion, rising to E33.2 billion, on propping up the CEE region, there was simply no more money left on the table.
Nor was there consensus about whether fresh efforts were needed. While both banks and bureaucrats loudly supported the VI talks, Vienna 2.0 was an orphan, touted only by the IFIs. This time, says RBIs Grüll, the process was driven from the beginning by IFIs. There was involvement by the commercial banks, but the banks didnt kick-start the new initiative.
To an extent, this reticence is understandable. With no new funding available, there is a feeling among commercial lenders that the V2.0 talks were largely cosmetic, a process designed to remind the region and its governments that the IFIs, at least, were listening.
Commercial lenders, moreover, already facing severe pressure to boost capital in one jurisdiction without shedding it too hastily in another, have been irked by the lack of a cohesive regulatory regime, at both national and regional level. Few were enamoured by the new tier 1 capital limits imposed arbitrarily, they say on lenders by the European Banking Authority. Some now expect the legislation to be scrapped sooner rather than later. I dont believe the 9% rule will last beyond the end of the year, says RBIs Grüll.
Elsewhere, local rules have also left banks scrambling to catch up. Hungarys FTL rule caught many on the hop. A November 2011 decision by the Austrian government to restrict new lending to 1.1 times the deposits and wholesale funding that banks local units are able to raise on their own, and to force banks to hold at least 10% of capital by 2016, was poorly timed.
That move, criticized by both banks and IFIs, made it harder for Austrian institutions to raise lending significantly across the CEE region. These moves, warns EBRDs Nagy, smack of clear-cut cases of regulators failing in their job description. Our main focus is to get regulators talking effectively to each other, she adds. Banks are in the crossfire of regulatory coordination failures across Europe, hit by competing demands from local, regional and global regulators.
Adds Grüll: Cooperation [between national regulatory bodies] is essential to ensure that any individual move by one country does not harm another countrys development.
IFIs have their own gripes, notably the poor data flow emanating from banks and national regulators. EIB chief economist Debora Revoltella notes that statistics relating to the rate of deleveraging by western European banks remains patchy at best. There is a six-month delay on some statistics, and that is not acceptable. All IFIs are working together to try to get hold of better data flows, and this helps the process of coordination.
This also provides a big clue as to why commercial banks arent as keen on Vienna 2.0. One IFI official, talking on condition of anonymity, notes: The banks dont always want us to know where and when [they are deleveraging] as they worry about looking weak, and spooking investors.
If true, that would make sense: no bank wants to look like its retreating from a market before its peers. Again, that raises the question of whether Vienna 2.0 was really necessary. Im always sceptical about whether governments can really do anything just by getting together and talking to each other, says Capital Economics Shearing. It keeps the issue alive, and its right that the EBRD and the EIB continue to talk up risks of fragility in CEE. But frankly I think its a lot of hot air.
For now, there seems little common ground between the bureaucrats and the commercial banks and what goodwill there is appears to exist only grudgingly. It makes sense that the Vienna Initiative continues but that it is not driven by commercial banks," says the RBIs Grüll.
All of the goodwill of the Vienna Initiative, unveiled to rapturous applause more than three years ago, has thus been reduced, through Vienna 2.0, to the sound of one hand clapping.