EBRD warns of capital outflow from Eastern Europe

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There is growing consensus among financial regulators and institutions about the need to for a new Vienna Initiative to curb the outflow of capital from emerging Europe, a senior banking official said today (17 January).

Erik Berglöf , chief economist at the European Bank for Reconstruction and Development (EBRD), made this appeal speaking at the Euromoney conference in Vienna, Reuters reported.

On Monday, officials from regulatory bodies, international lending institutions and other groups met in Vienna to discuss coordinating policies to avert the sudden deleveraging by western banks from Central and Eastern European countries that depend on their capital.

"What I took away from this meeting was a remarkable consensus," Berglöf, said, adding: "Now it's time to sit down and work out the details together with the private sector."

The 'Vienna initiative' was put in place in 2009, following the global financial crisis, by the European Central Bank (ECB), EBRD, national regulators and banks with branches in Central and Eastern Europe.

On this occasion, the bank headquarters agreed to retain their presence in the region and recapitalise their branches using funds from the EU and the International Monetary Fund. However, the scope of the initiative came to an end in April 2011.

Up to 12 of the 16 key western banks in Eastern Europe, under pressure from regulators to recapitalise, have resorted to shrinking outside their home markets to beef up capital levels, the EURACTIV network recently reported.

Many of the foreign banks that dominate the region – including UniCredit of Italy, KBC of Belgium, Commerzbank of Germany and Raiffeisen of Austria – have suffered as a result of the eurozone debt crisis. Several are reportedly limiting credit availability for Eastern Europe in an effort to recapitalise their home bases.

After the downgrading of Austria's AAA rating by Standard & Poor's – in part due to its banks' exposure abroad – Berglöf said banks could be posed to more swiftly reduce their exposure in Central and Eastern Europe.

Berglöf said the country under the greatest threat is Hungary, because of its troubled public finances, but also due to measures adopted lately by the government with respect to foreign banks.

As EURACTIV Hungary reported in July 2010, a bank tax introduced by the authorities in Budapest caused a storm in the global business community. More recently, European Commission President José Manuel Barroso asked Hungarian Prime Minister Viktor Orbán to withdraw legislation that could threaten the Central bank's independence. An infringement procedure against Hungary could be announced later today.

EBRD is also working with Romania, Bulgaria and Serbia, which are particularly exposed to the Greek debt crisis, Berglöf said. He explained that EBRD was recapitalising the local branches of the Greek banks to make up for the lack of financial inflow from bank headquarters.

The European Commission published a press release about the results of the European Bank Coordination Vienna Initiative held yesterday in the Austrian capital.

Although the circumstances of the present crisis differ from 2009, there is a similar need for collective action to avoid suboptimal outcomes: this is Vienna 2.0, the statement reads.

Many of the foreign banks that dominate the region – including UniCredit of Italy, KBC of Belgium, Commerzbank of Germany and Raiffeisen of Austria – have suffered as a result of the eurozone debt crisis.

UniCredit – trying to plug a €7.4 billion capital shortfall – is refocusing its CEE operations on Poland, Russia and the Czech Republic at the expense of the 16 other regional countries where it has operations.

Commerzbank, whose shortfall is put at €2.9 billion, has announced a substantive freeze on lending within the Czech Republic and Slovakia.

Meanwhile, the French bank Société Générale (shortfall €3.3 billion) Austria's Erste Bank, Raiffeisen and Bank Austria (a subsidiary of Itlay's UniCredit) are expected to limit credit availability in Central and Eastern Europe.

Bulgaria and Romania – also exposed to the Greek crisis, since Greek banks have subsidiaries there – are particularly at risk. The effect is rippling into EU hopeful Serbia, where KBC and Austrian-based Hypo Bank are in the process of selling subsidiaries.

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