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UPDATE 2-Bankers clash over commitment to eastern Europe
January 17, 2012 / 4:45 PM / in 6 years

UPDATE 2-Bankers clash over commitment to eastern Europe

* Vienna Initiative 2.0 aims to halt stampede from region

* EBRD worried about unruly flight from emerging Europe

* Austrian banks play down danger of credit crunch

By Michael Shields and Michael Winfrey

VIENNA, Jan 17 (Reuters) - Top bankers sought to play down fears on Tuesday that they would abandon emerging Europe in a rush to hoard capital that could cripple efforts to bridge the continent’s economic divide, but one senior official warned the process was already under way.

Western banks need to shore up their balance sheets under regulatory pressure to ensure a debt crisis does not drag them into the abyss again just as it seemed they had turned the corner from the 2008/09 financial crisis.

That has stoked worries that lenders heavily invested in central and eastern Europe will curtail business there, leaving the region exposed to a credit crunch that would paralyse the growth countries need to boost prosperity.

Governments, regulators and international agencies agreed in Vienna to cooperate in trying to avert a stampede from the region, especially in Hungary and countries in southeastern Europe that analysts say are most at risk of a banking crisis.

The programme is being called a second “Vienna Initiative”, loosely modelled on a 2009 pact that prevented a financial meltdown in eastern Europe as an economic boom went bust.

But officials at a regional economic conference disagreed on how big the danger was, and whether banks were even deleveraging - scaling back business - at all.

“There will be no general deleveraging” by Austrian banks, the leading lenders in the region, Austrian National Bank Governor Ewald Nowotny told reporters.

“Wherever there are good opportunities where it makes sense from an economic point of view, Austrian banks will be prepared to grant loans,” he said.

The head of Raiffeisen Bank International, emerging Europe’s third-biggest lender, saw scant danger of having to scale back in the region.

“There is no deleveraging taking place,” RBI Chief Executive Herbert Stepic said at the Euromoney conference.

“What is happening is probably it will come to very slow or no growth of bank assets. But what I am seeing now, also in the last quarter, is that is not coming to a reduction in assets.”

That contrasted sharply with warnings from Erik Berglof, chief economist of the European Bank for Reconstruction and Development and a key architect of the new Vienna Initiative.

“We are very concerned about a lot of signs of deleveraging, about a lot of announcements of a reduced commitment in the region, the fact that a number of subsidiaries are for sale and so on,” he told Reuters in Vienna.

Berglof would not give details on which banks were for sale, but said, “there are quite a few subsidiaries in play”.

Austrian regulators in particular have come under fire for pressing ahead unilaterally with rules that link lending growth by CEE subsidiaries to the amount of financing they can arrange locally.


Berglof told the conference he was encouraged by the consensus emerging on policy coordination. “Now it’s time to sit down and work out the details together with the private sector.”

But London-based Capital Economics called the discussions “a damp squib”, noting that in the first incarnation of the plan the European Union and international financial institutions ponied up 24.5 billion euros and secured commitments from western banks to maintain their exposure in the region.

It said there was no sign of a similar commitment this time, adding that Hungary appeared to be most at risk after a string of policies had alienated lenders and because of its reluctance to accept help from the EU and IMF, with whom it is in tortuous talks now for a financing package.

“We also remain concerned about Romania, Bulgaria and Croatia, but their problems are probably manageable with external help,” Capital Economics said in a research note.

The original Vienna Initiative helped west European banks maintain their exposure to subsidiaries in emerging Europe at the height of the global financial crisis, but the commitments expired last April.

Banks have since come under new pressure to sell assets to raise their core capital ratio, reduce their risk profile and focus on home markets, while their ability to fund themselves on capital markets has weakened.

Among the main lenders concerned are Austria’s Erste Group Bank and Raiffeisen Bank International, Italy’s Unicredit and Belgium’s KBC, all of which face regulatory pressure to boost their capital buffers.

The aims of the initiative dubbed “Vienna 2.0” are more modest than in 2009: to slow the pace of deleveraging and avoid a regional funding crisis rather than to maintain investments.

“In the absence of coordination, excessive and disorderly deleveraging as well as a credit crunch may be the outcome,” an official statement by the bodies taking part in the new Vienna Initiative-style plan said.

The initiative brought together representatives of the banks’ home and host countries, plus the European Commission, the European Banking Authority, the European Systemic Risk Board as well as the International Monetary Fund, the EBRD, the European Investment Bank and the World Bank.

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