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Cee money vienna initiative 20 faces uphill battle

Jan 20 Emerging Europe's financial stewards scrambled this week to head off capital flight from the region, but their plan to create a new "Vienna Initiative" faces bigger challenges than the one that successfully backstopped lenders two years ago. Western European banks are cutting off some lending lines and selling assets to heal balance sheets injured by the euro zone debt crisis and to meet new capital rules issued by the European Union's EBA banking authority. The extent of the retreat from central and eastern Europe - a region stretching from the Baltics to the Black Sea that has been the main driver of profits growth for the western-owned banks investing there - is not yet clear. Morgan Stanley said last month that 80 billion euros ($103 billion) was at risk from "deleveraging" in the region. Other estimates put the figure closer to 20-30 billion euros. But the trend has already begun, with some banks putting their subsidiaries up for sale and data showing declines in lending in the most affected countries."Bank balance sheets of important parent groups with systemic presence in our region have been hit," Piroska Nagy, a senior adviser at the European Bank for Reconstruction and Development, told an economic conference in Vienna this week. "If we look at the credit numbers, there is source for concern."She said Hungary - where banks face Europe's highest taxes and have been forced to take losses on foreign currency loans, and whose new central bank law has been sharply criticised - was most affected, "very closely followed by many other countries". GROWTH IMPACT The biggest western-owned banks operating in emerging Europe are Italy's UniCredit, and Erste Group Bank and Raffeisen Bank International of Austria. French bank Societe General, Belgium's KBC and others are also big players. They took part in a broad pact between private lenders, regulators and international institutions which agreed under the first Vienna Initiative to stay invested in the region when the global economic crisis hit in 2008.

But those pledges expired in April, and now banks must meet EBA guidelines calling for them to boost core Tier-1 capital to 9 percent of risk-weighted assets by mid-2012 by selling shares or other means. The official sector agrees it needs to coordinate policy in the region, an indirect criticism of Austria's solo effort to rein in bank lending growth, and will meet banks by early March. It wants "binding commitments" from banks to stay put, but asset sales are already underway and credit supply is falling. Also absent is the 24.5 billion euros in secured commitments from western banks made under the first initiative. The primary fear is that western-owned banks will cut off cross-border lending and sell subsidiaries - sometimes at fire-sale prices or to less reliable owners - in moves that will shut off badly needed avenues of credit. That could hit countries like Bulgaria, where Greek banks hold over a quarter of lending assets, or its neighbours Romania and Serbia, where it is one-sixth. Hungary - where the government has imposed steep costs on lenders via its banking tax and relief for holders of billions of euros in foreign exchange loans - is seen most at risk.

"We remain of the view that a number of countries in the East, notably Hungary but also Bulgaria, Croatia and Romania, are at high risk of a banking crisis," research house Capital Economics wrote in a note. A second fear is that deleveraging will crush expansion in the poor countries that have long depended on foreign bank lending in their slow convergence with richer western Europe."To the extent that the deleveraging is more than we currently anticipate, obviously this will have macroeconomic effects," said Anne Marie Gulde-Wolf, a senior adviser at the International Monetary Fund's Europe Department."It will depress growth."Already Hungary is expected to slouch into economic contraction this year, the Czech central bank expects zero growth there, and other policymakers from Poland to Pristina have been slashing growth forecasts.

CREDIT, SALES Lending in southeastern Europe has declined on a month-on-month basis for the past year, most recently slipping 1.14 percent in November, according to the most recent data from the EBRD and provided to Reuters. Data showed lending growth in Poland had stabilised after languishing in negative figures since the start of 2010, but Hungarian credit growth was just 0.57 percent in the third quarter, and could easily fall into the red. As for bank asset sales, EBRD chief economist Erik Berglof said this week there were "quite a few subsidiaries in play". Russian lender Sberbank is expected to close a deal to buy the eastern European arm of Austria's loss-making Oesterreischische Volksbanken AG by mid-February. Portugal's Millennium BCP tried to sell its Polish unit but dropped the plan in December after failing to attract the price it wanted. KBC has put its Polish subsidiary, Kredyt Bank, on the block. But the region's biggest lenders say they will not abandon a region that has been their main source of profit growth. Gianni Papa, deputy group chief executive and head of Unicredit's CEE division, rejected last month media reports that the bank may consider an exit."If the message received is UniCredit is pulling out from central and eastern Europe, I believe that the one that is receiving the message is nuts," he said. Raiffeisen Bank International CEO Herbert Stepic said in December the bank could pull out of one or two markets in the region. But he added it would still continue to invest."We won't run away because that continues to stay the growth engine for Europe," he said this week.

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Money markets ecb rate cut bets push back to october

Feb 10 The European Central Bank is not expected to cut interest rates again until October at the earliest, money market prices showed on Friday, as traders exited bets for a move in March after the bank gave no hint of further monetary easing any time soon. ECB President Mario Draghi on Thursday pointed to signs the euro zone economy had stabilised recently while warning of big risks to growth, which analysts took as a signal the bank would keep rates steady at 1 percent for the near term. A Reuters snap survey of 57 economists showed only 14 now think the ECB will cut interest rates by 25 basis points to 0.75 percent next month. By contrast, a regular survey last week showed 41 out of 71 analysts thought the central bank would resume rate cuts before the end of the first quarter. Calculations based on one-week Eonia rates show money markets are pricing in a 12 percent probability the bank will resume lowering its refinancing rate in October."You have rather flattish Eonia curve until October ...(which) shows the market is convinced the ECB will continue to carry out its unconventional measures but will not move on the refi rate or conventional policy," said Matteo Regesta, a strategist at BNP Paribas. Economists at RBC Capital Markets said they were no longer expecting further rate cuts from the ECB, reversing their call before Thursday's ECB meeting for further monetary policy easing in coming months.

The ECB's emphasis on some tentative signs of stabilisation in economic activity was consistent with maintaining an expansionary monetary policy, they said."But the diminishing stresses in financial markets and the banking system will probably do enough to ease monetary and financial conditions to enable the ECB to avoid crossing the 1 percent level," they said in a note.

CASH MANIA Interbank lending rates kept up their downward trend on Friday after Draghi urged banks to make use of the generous long-term liquidity the central bank will offer later this month. The ECB also approved an expansion of the type of collateral it accepts at its liquidity operations, which could see banks snap up three-year funds on offer on Feb. 29 after they took up nearly half a trillion euros of the first loans in December.

With expectations of the uptake for the February round matching or even exceeding December's demand, downward pressure on lending rates in the money market remains intense. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending, fell to 1.063 percent, the lowest level since late January last year. Equivalent London offered interbank rates fixed at 0.99157 percent, its lowest in just over a year and down from 0.99943 percent. Signs of money market stress have also been abating, with the trend set to continue barring Greece tipping into a chaotic default after its efforts to secure a second bailout hit another glitch on Thursday. The spread of three-month euro Libor over OIS or anticipated central bank rates, tightened two basis points to 64 bps on Friday, down from over 90 bps hit in early December."As long as the mania about the ECB liquidity continues and with an accident in Greece being averted for now, there is no point in taking the other side and we expect spreads to come in further, both in spot and forward terms," Commerzbank strategist Christoph Rieger said.