IFIs urged to step up east Europe bank support

03/10/2009 | Simon Pirani, Sid Verma

Eastern Europe’s ailing banking systems need more multilateral funding, bankers have warned ahead of their meeting on Monday with the European Commission and international financial institutions

Eastern Europe’s ailing banking systems need more multilateral funding, bankers have warned ahead of their meeting on Monday in Istanbul with the European Commission and international financial institutions.

A year after the Wall Street meltdown, Ukraine’s banks remain the most vulnerable. Hungary and the Baltic states, especially Latvia, also cause concern.

Herbert Stepic, chief executive of Raiffeisen bank, one of the western institutions most heavily exposed to the region, told Emerging Markets: “We need assistance from multilateral lenders in these conditions – capital assistance and liquidity assistance.”

Stepic said the IMF mandate needs to be prolonged in Ukraine, and that the multilaterals had to press the country’s regulators to improve conditions for foreign banks working there.

He said there had been a “slightly improving trend” across the region as a whole, and that more short-term liquidity is available, but that serious problems remained in some countries.

Luis Costa, emerging market debt strategist at Commerzbank, said: “Ukraine has been the main recipient of EBRD help so far, and that will be the trend in 2010 and 2011.

“It’s still not finished”, he added. “Only 50%” of post-crisis write-downs have been done so far.

The IMF, World Bank, EBRD and European Investment Bank met in London last week with representatives of the European Central Bank and 15 “systemically important” EU-based parents of eastern European banks. Central banks and fiscal authorities from western European nations and five eastern European EU member states were also present.

The meeting reviewed the European Bank Coordination (“Vienna”) initiative, an agreement reached last year that the IFIs would support eastern European bank restructuring, provided private banks recapitalised subsidiaries and maintained their exposures.

A statement issued after that meeting acknowledged that “important challenges” remain, including “ensuring financial system health”. Monday’s meeting must address how the challenges are met.

After last week’s meeting, EBRD president Thomas Mirow wrote to shareholders asking for an extra euro 10 billion, to raise its capital by 50% and enable it to step up lending – much of which would go to the banking sector.

Ahead of Monday’s meeting, Zsolt Darvas, researcher at European think-tank Bruegel, told Emerging Markets that while parent banks have largely remained committed to eastern European subsidiaries, they “will soon take the decision to gradually reduce their exposure” due to a prolonged period of weak growth that will reduce “profitability”.

Reynold Leegerstee, banking analyst at Moody’s, argued that the Vienna initiative had “helped to boost depositor confidence”. However, lower capital inflows to the region and prolonged economic volatility will make it more difficult for parent banks to “price credit and liquidity risk”. This will serve to inhibit the business-operating environment further.

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