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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.

Merkel: Our generation must create a political union in Europe

Step by step, Europe needs to move towards political union, said German Chancellor Angela Merkel. She define the debt crisis in the euro area as “the most serious challenge for the region after World War II.”

With its one-hour speach infront thousands of delegates of the Christian Democratic Union, Merkel did not offer new ideas to solve the crisis, which forced Greece, Ireland and Portugal to seek international financial assistance and pose existential concern for monetary union as a whole.

Merkel, however, clearly pointed out that Germany will have to make additional sacrifices. Party congress in Leipzig runs under the motto “For Europe – for Germany.”

“The challenge of our generation is to finish what we started in Europe, and namely the step by step to create a political union,” she said infront of the party congress in Leipzig. “Europe is experiencing one of its worst crises, perhaps the worst since the Second World War,” she said.

The focus on the two-day party meeting had to be the German education system. Instead, the talks were dominated by issues of European debt crisis, which continued to grow even after the election of a new expert governments in Greece and Italy.

If Germany does not have early parliamentary elections, the mandate of Merkel, who came to power in 2005, will expire in 2013. The German Chancellor seems aware that she can easily become another victim of a political crisis if she fails to play her cards cleverly enough.

In 1999, exactly the Christian Democratic Union, led by then-Chancellor Helmut Kohl united Germany to the Pact for the euro.
Almost 13 years later, many German conservatives are worried about the funded with taxpayers’ money aid for troubled eurozone countries. Conservatives are extremely sensitive to the fiscal irresponsibility of the countries of the periphery of the euro area and the danger to the crisis to compromise the independence of the European Central Bank (ECB).

Some fractions of the party of Merkel even agree that the whole project with the European single currency was a mistake that must now be corrected.

Merkel, however, highlighted that Germany has a responsibility to their partners and that it is vulnerable if other eurozone countries are overtaken by the crisis. Chancellor reminded her colleagues that 60% of German exports go to the European Union (EU).

“Irish problems are Slovakian problems, Greek problems are Dutch problems, the Spanish problems are our problems,” said Merkel. “Our responsibility does not end at the German border,” she said.

Meanwhile, Merkel emphasizes that there are “red lines” that Germany is not ready to cross, rejecting once again the idea of ​​issuing common Eurobonds and other hasty decisions that in Berlin would not encourage European governments to adhere to responsible fiscal policy.

The problem is that the crisis was not created overnight, but it is result of decades of mistakes. Therefore we can not resolve it by waving a magic wand, says Merkel. “We are facing a long and difficult road,” she added.

If the crisis deepened in the euro zone before the next elections in Germany in which one or more countries are forced to leave the union – an event with serious economic consequences for the region as a whole, even the most skillful political maneuvering would not save Chancellery chair.

China wants to save Europe again

New request from China to help Europe was made the day on which European leaders gathered for the second three days meeting, which had to be sought the debt crisis and problems in Greece.

Emerging market economies and China in particular are reluctant to participate in the European Support Fund through the International Monetary Fund (IMF). It said an unnamed source “close to decision makers in Europe,” quoted in “China Daily”.

According to this source, “the consent of the emerging market economies may be included in the final document of the summit of European leaders’ forum in Brussels if they decided to open up that fund for the participation of foreign investors – both private and public. Formal confirmation of this information was not received.

The capacity of the European Financial Stability Fund is now 440 billion dollars. It is believed that in terms of markets that this is not enough for the Fund to cope with the situation, if the crisis infect a large economy such as Italy. Recently emerged ideas fund be increased to 1 trillion euros. Its fate would have been a major subject of discussion at a meeting of leaders of the eurozone.

Reuters said before the meeting of leaders of the euro area, the chances to reach an agreement on measures against the debt crisis appear slim. EU expressed its readiness to support banks, but does not indicate a specific figure for their recapitalization, said in the draft of the meeting, told Reuters. “New York Times” also predicts failure of the meeting.

Discussions to reach a deal on the euro become complicated, including significant restructuring of the Greek debt, pouring new capital in European banks and increasing the rescue fund so as to prevent financial panic in Italy and also in Greece and Portugal, the publication notes. Meanwhile, shortly before the summit, the German Parliament Chancellor Angela Merkel supported the project. Lawmakers of the Bundestag have received a secret report which says that the future of Greece is a bleak.

Europe and the euro are on the edge

Europe and the euro are on the edge, warned one of the initiators of the European Common Market and a former European Commission president Jacques Delors in an interview with Belgian newspaper Le Soir and the Swiss Le Temps, quoted by RIA “Novosti”.

86-year-old Delors said that the meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy on Tuesday did not lead to real solutions for the withdrawal of euro area debt crisis.

“Let’s open our eyes – the euro and Europe are on the edge. I think the choice is simple: either the Member States would agree to closer economic cooperation, which I’ve always wanted, or will provide additional powers to the Union”, he said, referring to the European Union.

In his second of the two options was rejected by a majority of the 27 Member States and remains the first.

Delors also believes that the refusal of closer economic cooperation with the community threatens disintegration.

After meeting on Tuesday Merkel and Sarkozy proposed to establish a common economic government for the euro area member states, led by President of the European Council, Herman Van Rompuy.

In addition, they offer an additional tax on financial transactions, but said it considered premature to introduce the idea of ​​bonds, common to the euro area.

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