On Monday, banking regulators and officials from seventeen countries met in Vienna to discuss ways to keep credit from western banks flowing to Central and Eastern Europe (CEE), following new capital and liquidity requirements that could see credit dry up across the region.
Key players at that meeting – notably senior officials from the IMF, EBRD, European Commission and World Bank – took part in a panel discussion the following day chaired by Emerging Markets at Euromoney’s Central and Eastern European Forum in Vienna.
The focus of yesterday’s discussion: how to prevent a credit crunch and regional banking crisis in CEE that could dwarf the downturn in 2008. And more specifically, prospects for a new plan – informally dubbed Vienna 2.0 – that would cushion the impact on emerging Europe of deleveraging by western banks – and find ways to unwind credit sensibly, taking into account systemic risk.
Delegates were united in their recognition of the severity of the risks facing the region, and the urgent need for such a plan.
Piroska Nagy, director for Country Strategy and Policy at the EBRD and a key architect of the 2009 Vienna Initiative, said that the plan must now be revived to prevent the crisis from taking hold in CEE, but she acknowledged that getting a deal in place was far from guaranteed:
“Vienna 2.0 will be about smoothing the effects and also shaping the framework in which cross-border relationships will actually work. It is basically a crisis resolution framework,” she said.
“Until six or seven months ago things were going pretty well. This time the shock really comes from west to east. Bank balance sheets have been hit, our region is extremely exposed to the Eurozone crisis.
“It is obviously critical that this initiative is in place as long as there is this [funding] gap. We should be there so long as this gap exists.”
But she added: “It’s not a foregone conclusion. It will require a lot of work to get everyone on board.”
A failure to agree to Vienna 2.0 could threaten free market capitalism itself in Eastern Europe and lead to a reversal of the process of European integration, she warned.
“This whole model [of capital provision] is at risk. It’s also important to recognise that this is pretty much it. With Vienna I it was new. Now we have Vienna II. I don’t think there should be Vienna III. If they don’t [go for Vienna II], I can see in certain countries that this type of scenario, of deeper integration [with Europe], will no longer be desirable.”
Panellist Anne-Marie Gulde-Wolf, deputy director of the IMF’s European Department, acknowledged that “the threat is of deleveraging” and that this process “will have macro effects on a number of sectors, households and companies” across the region.
She added that the IMF was conducting a thorough analysis of the effects of deleveraging in CEE, as the institution prepares for the possibility of a bigger role in the region if the crisis escalates.
The IMF on Wednesday announced that it aimed to raise up to $500 billion in additional lending resources, in order to ramp up its overall financing capacity to $1 trillion.
Analysts were quick this week to deride the Vienna group’s efforts on Monday. Capital Economics called it a “damp squib” in a research note on Tuesday.
And others have pointed out that – crucially – the banks did not participate in the Monday meeting.
That point was taken up forcefully during the panel session by Gerardo Corrochano, director of the World Bank’s Financial and Private Sector Development Department, and a participant in the Vienna Group meeting.
“I was shocked in Washington before coming over when I heard the banks were not participating because they’d decided it wasn’t necessary. These are their markets. They should have a particular interest that [Vienna II] happens.”
He added: “The fundamental need for avoiding collective action failures remains. The participation of the private sector is not a choice.”
Earlier, Albania’s central bank governor Ardian Fullani told Emerging Markets that the lack of private sector participation so far in the Vienna 2.0 process was a source of considerable concern.
But Austria’s central bank governor Ewald Nowotny insisted at the Euromoney conference on Tuesday that Austria’s banks were not about to beat a retreat from eastern Europe.
Nagy said the principal problem remained a lack of coordination between western regulators and their CEE counterparts on the one hand, and between parent and subsidiary banks on the other.
“Despite all the progress that has been made, this coordination between home and host is still not effective. Let’s be clear about it: the coordination – it’s still not there. It’s sad we’re still there facing these coordination problems, but there was at least a recognition of the problem.”
Her point resonated with panellist Elemer Tertak, principal adviser to the European Commission’s Director General of the Internal Market Directorate.
He said: “There is still a coordination failure. This is a big challenge in Europe. All decisions are still nation-based. It’s important [for everyone] to participate and to find a better-coordinated outcome.”
With the outlook for CEE deteriorating rapidly, that coordination – elusive for the past three years – had better materialise fast.