EBRD: Eastern Europe must be prepared for another crisis

For the second time in three years the European Bank for Reconstruction and Development (EBRD), talks with bankers and politicians from across Europe in an attempt to prevent the drying up of capital flows to subsidiaries of Western banks in Eastern Europe, writes Bloomberg.

The decision will be different from the Vienna Initiative – a commitment in 2008 of the largest European banks to support Eastern European subsidiaries after the collapse of Lehman Brothers, said Piroska Nagy, Advisor to the EBRD. Agreement can be reached within a few weeks, she said.

“What is needed in the current situation is strengthened coordination,” said Nagy. “Otherwise we will witness the negative effects of unilateral narrow decisions of individual governments,” she said.

A month ago, European leaders agreed that by the end of June 2012 European banks need to raise their capital adequacy ratio to 9%. Since about three quarters of the banking sector in Eastern Europe is in the hands of Western banks, including UniCredit and Erste Group Bank, the financing of local Eastern European subsidiaries of these banks is likely to be frozen, warns EBRD.

According to the European banking regulator (EBA) European banks need 106 billion of fresh capital. Italian UniCredit, the largest bank in Eastern Europe, has to raise 7.38 billion. Erste, which owns the second largest banking group in the region needs 750 million euros.

Debt crisis may limit demand for Eastern European exports and lower capital flows to the region, in 2008, says the annual report published today by the EBRD.

“Unfortunately, the region should prepare for another crisis,” said the chief economist of EBRD Erik Berglof. “If the crisis gets out of hand, financial integration model between Western and Eastern Europe could be threatened.”

Economies in Eastern Europe are in better shape than in 2008 and are less dependent on external financing. Eastern banks balance sheets are generally in better condition. However, due to high levels of bad loans that have not yet reached its peak, additional capital will probably be needed.

Shocks in Western Europe pose a serious risk of worsening the already not very optimistic outlook for Eastern Europe, said the EBRD. Most vulnerable to the looming credit crunch are Hungary, Slovakia and Bulgaria, followed by Croatia, Slovenia, Romania and Poland, the bank warned.

Moody’s Investors Service, which today lowered its forecast for the Polish banking sector to negative, expected “over the next 12-18 months the pressure on the sector to gradually intensified, adversely affect the asset quality, liquidity and profitability.”

Western banks may withdraw from Eastern Europe about 13 billion euros, Peter Attard Montalto calculated, economist at Nomura International Plc in London.