Financial history is littered with examples of lamentable
international cooperation, stretching from the collapse of
Lehman Brothers back through to the Great Depression. So when
the worlds leading institutions come together in seeming
harmony to prevent the meltdown of an entire region and
succeed its worth both generous applause and
When the European Bank Coordination Initiative also
known as the Vienna Initiative was launched in January
2009, it was more than a fiscal promissory note to the troubled
nations of central and eastern Europe.
A key aspect of that plan was a coordinated effort to
weave together the best efforts of the private sector and
leading international financial institutions. That wedded the
management and drive of major regional banks, notably
Vienna-based Raiffeisen Zentralbank and Erste Bank, to the
long-term procedural and strategic capabilities of the World
Bank, IMF, EBRD and European Investment Bank (EIB).
The institutions backing the Vienna Initiative pledged E24.5
billion in new funding to a region threatened by a systemic
outflow of capital, notably by troubled global and European
lenders seeking to shore up capital at home.
That process introduced specialist distressed debt managers
to help clean up sovereign balance sheets in the likes of the
Ukraine, Georgia, the Balkans and the Baltic region. And it
injected capital directly into deeply troubled regional banking
sectors. The International Financial Corporation (IFC) has
alone pumped $200 million into Georgias leading lenders,
mobilizing a further $330 million in support from other
international financial institutions.
But most of all, the Vienna Initiative introduced the world
and even long-in-the-tooth legislators to a novel
experience: genuine, workable and even prescient global
cooperation, at a critical point in economic history.
To my knowledge, this was the first time the big
international financial institutions have all worked together
in such a coordinated way, says Jyrki Koskelo,
vice-president of global industries at IFC. Basically we
all created a platform where everyone can talk I have
never seen anything like it. It was a multiple effort by
multiple countries and multiple institutions.
Herbert Stepic, chief executive officer at Raiffeissen
a man widely credited with helping to kick-start the
Vienna Initiative in November 2008, at the height of the global
banking crisis tells Emerging Markets:
The key reason why the Vienna Initiative was so
successful lies in the fact that all of its participants shared
a common interest, namely ensuring sufficient liquidity in the
regions banking markets.
The Vienna Initiative early on provided various CEE-focused
institutions with a platform on which to share ideas, and to
contrast regional troubles with the wider global crisis.
This was important, says Stepic, as some
stakeholders were initially focused only on their own most
immediate concerns and failed to grasp important
As with any successful team project, each of the main
players focused on their specific skill set. The EIB, widely
seen as the cornerstone of the project, extended most of the
longer-term loans. The EBRD was deployed to boost tier-two
banking capital and bolster regional trade. And the World Bank
and the IMF provided, respectively, longer-term and
shorter-term support to local banks and governments.
Of the E24.5 billion in pledged funding by end-2010, E19.3
billion had been made available by the end of 2009: E10.8
billion from the EIB, E4 billion from the purse of the EBRD and
E4.5 billion from the World Bank group.
If the Vienna Initiative is a concerted plan toward regional
financial coherence, its initial stages have gone remarkably
smoothly. CEE nations are crawling out of recession, joining
those (notably Poland) which rarely looked rattled by the
Key to the revival process has been the latent realization
that no one not global banks, international financial
institutions or multinational corporations, nor even powerful
regional lenders can simply place all CEE nations in one
basket. This is not the 1990s: Poland and the Czech Republic
are at a vastly different stage in their development to the
likes of Romania and Albania, just as the Balkans and the
Baltics have little in common.
The Vienna Initiative was an important step
toward a better understanding that one cant put all
countries in the region in one pot, Andreas Treichl,
chief executive and chairman of the managing board at Erste
Bank tells Emerging Markets. Most of the people
who made comments on the region had no clue what was going on.
Some even thought that Kazakhstan was neighbouring Austria.
This has changed thanks to the initiative.
Raiffeisens Stepic says: One important lesson
that the crisis has taught us is that we should look at the
economies in central and eastern Europe on an individual basis,
as opposed to making all-too-broad generalizations about the
region as a whole.
But the next phase is going to prove markedly tougher then
the first. Central and eastern Europe did not collapse
financially in early 2009, the toppling of individual dominoes
in Latvia and Ukraine failing to spark a more systemic regional
collapse. Many global lenders and investors pulled back from
the region sharply, but others did so in moderation, and many
more remained behind to man the ship.
Willem Buiter, chief economist at Citi, tells
Emerging Markets: We need the Vienna Initiative
on steroids for quite a few years to come until the banks in
continental Europe are finally properly recapitalized and
viable institutions again rather than the rather dodgy and
wonky banks that we have at the moment. Even if there is
trouble for the parents in Germany, France, Austria, the
Netherlands and Belgium, it should not be visited upon the
More remains to be done. Institutional capital has shored up
local balance sheets, but that doesnt mean that lenders
are committing capital to local projects and businesses. In
fact, the reverse is true.
There is very slow credit growth in Kazakhstan,
Georgia and other countries, including some in central
Europe, says Piroska Nagy, a senior adviser at the office
of the chief economist at the EBRD and an individual closely
associated with every step of the Vienna Initiative.
There is a very high risk perception in that region. Risk
is high and demand for lending is not strong.
There is a lag in the credit response to the economic
rebound, she says. And this credit lagging
behind the recovery is not totally unusual. There has to
be some improvement in the general economic picture for bankers
to feel able to lend.
Others believe that the capital does exist but that
banks remain either loathe to lend, or underwhelmed by the
quality of available borrowers. Banks are very liquid in
eastern Europe at the moment, says the IFCs
Koskelo. After we convinced everyone not to pull out of
CEE countries, local lenders just ended up here with a whole
lot of capital on hand.
Then there is the broader and far simpler fact that,
post-economic crisis, we live in financially straightened
times. Banks that overextended themselves in the good years
have less internal capital and like it or not a
diminished desire to lend to a relatively slow growing region
like the CEE.
Both banks and investors have understandably taken a
far stricter approach to the issue of risk in the wake of the
economic crisis, says Raiffeisens Stepic. So
although both risk premiums and currencies in CEE have
stabilized over the past year, lending volumes remain
low. He says regional states could do more to boost
domestic savings, aided by local lenders creating attractive
and innovative new financial products.
Another looming threat in the CEE and elsewhere
is that of rising distressed debt levels. Non-performing
loans (NPLs) are set to jump as lenders absorb a mass of
defaults caused in equal measure by 10 years of steady and
sometimes wild lending growth, and a further two years of
severe economic crisis.
WORDS OF CAUTION
In its latest Global Financial Stability Report, released
this April, the IMF says NPLs had increased
substantially throughout CEE since the onset of the
global financial crisis. Its predictions were bleak: that
failed loans as a percentage of total lending would remain
uncomfortably high until at least 2014, notably in the Baltic
region, Russia including the CIS, and south-eastern Europe
including the Balkans.
The fund says: Our projections suggest that bank asset
quality will improve only gradually in 2011 for most CEE
countries, even if GDP growth recovers during 2010. And in the
event of a further splintered crisis such as a double-dip
recession, NPL ratios would increase by around one-third
during 2010 in all sub-regions except the CIS, and would remain
elevated in 2011.
Leading regional bankers are reasonably optimistic. Erste
Banks Treichl says that while NPLs doubled or
tripled over the last few quarters, the market, he hopes,
has seen the worst.
Raiffeisens Stepic again highlights the financial
diversity of a region in which robust Poland can neighbour
tattered states like Ukraine and the Baltics. But he insists
that overall failed loan ratios are trending downward
throughout the region. While NPL volumes are expected to
continue to grow through 2010, the rate at which they do so is
likely to be noticeably below the very steep NPL growth rates
that the CEE posted in 2009, he says.
So having staved off for now the worst of the
financial crisis, many are raising some pressing but as yet
unanswered questions. Does the regions banking model need
to change in the light of our straightened times? And what
lessons, if any, have CEE states learned from the financial
The banking model throws up sharply divergent opinions.
Asked if the CEEs banking model should be tweaked or even
built anew, Erste Banks Treichl scotches the notion.
Not at all! he says. It is a banking model
that focuses on retail banking. And this has proven to be very
resilient to the economic downturn we have
Raiffeisens Stepic isnt so sure. He believes
that the crisis brought to an end an era in which the
CEEs banking markets could rely on comparatively
cheap financing from abroad. Future growth in the
markets including in loan volumes will largely
depend on how successful these attempts to promote domestic
savings are, he says.
And the lessons learned? Again they are both manifold yet
basic. First, CEE states need to develop local capital markets
and boost savings rates, as well as drawing up rules that
encourage local lenders to create financial products that aid
and encourage this process.
Regional states must also learn to balance the books. Those
nations that borrowed most heavily from overseas were those
most heavily battered by the financial winds that tore across
the world in late 2008 and 2009.
Finally, the CEE and its people need to understand that they
cant have everything they want today. No one can, least
of all the inhabitants of a relatively slow-growing region that
has, in most sovereign cases, struggled to define itself in the
post-Soviet era. Some people in the CEE were trying to
grow too fast, and trying to enjoy tomorrows fruits
today, says the IFCs Koskelo.
Yet for all of these relative negatives, and the pain
involved in extricating an entire region from a lingering
fiscal and economic downturn, the past 18 months have been
surprisingly revelatory for central and eastern Europe.
A few lone sovereign defaults did not spell doom for
everyone. Distressed debt is rising and credit growth is
understandably still way down on pre-crisis levels, but a new
sense of financial reality is at last permeating a region that
looks ready to stand on its own feet.
Moreover, the CEE region played host to that rarest example
of them all: global institutions tearing up the rule book,
discarding their own vested interests, and working together to
the benefit of all. By any measure, the Vienna Initiative has
been a resounding success its ability to corral
institutional capability and wed private- and public-sector
capital unheard of in peacetime.
We learned that if we see problems looming, and so
long as we all work together, we can minimize damage and not
just within our own silos, says Koskelo.
Stepic says: A final lesson is one that the Vienna
Initiative has taught us: there is lots to be gained through
cooperation that extends beyond borders and includes
stakeholders from both the public and private sectors.
Most of the regions economies are back on the path
to recovery, he says, and those aspects that
propelled its long-term growth perspectives strong
productivity growth rates, high levels of education, and
competitive tax regimes remain as valid as ever.