1st Bank of Greece Workshop on Economies of Eastern European and Mediterranean Countries The Global Financial Crisis and SEE: Lessons for Macro-economic Policy and Financial Stability Market Response

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1st Bank of Greece Workshop on Economies of
Eastern European and Mediterranean CountriesThe
Global Financial Crisis and SEELessons for
Macro-economic Policy and Financial
StabilityMarket Response The Commercial
Banks ViewNandita Reisinger-ChowdhuryRZB
AGHead Country Risk Portfolio Management
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The Global Financial Crisis

• September 2008
• The collapse of Lehman Brothers had a
  particularly strong impact on CEE SEE
• Massive widening of CDS spreads
• Collapse in inter-bank funding
• Some countries were faced with deposit
  withdrawals
• Currencies came under massive pressure
• November 2008
• International Financial Institutions begin to
  provide support to countries in need
• April 2009
• G-20 Summit marked a vital turning point for
  CEEs economies and banking sectors
• Tripling of IMF Resources to USD 750bn,
• Doubling EU financial aid to CEE to USD 50bn,
• New flexible IMF Credit Line,
• World Bank resources
• Central banks loosened monetary policy

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5-yr Sovereign CDS Spreads Pre-Crisis to Today
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Unsustainable Growth model came to a sharp stop
GDP Growth Rates 2007 - 2011
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Widening Current Account Deficits
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Substantial Financing Requirements
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Emergency Programmes became necessary

• IMF Stand-by in total of USD 60bn to Serbia,
  Bosnia, Hungary, Latvia, Ukraine and Romania
• IMF Short-term Credit Line to Poland amounting to
  USD 20.5bn
• EU BoP assistance to Hungary EUR 20bn, Latvia EUR
  7.5bn and Romania EUR 20bn
• EBRD, the EIB and the World Bank have been
  increasing their financial support to the region
• Banks signed bilateral agreements with the local
  Central Banks to keep their global cross- border
  exposure to specific countries constant and to
  participate in Central Bank stress testing
  exercises and commit to high capital ratios for
  the subsidiaries even under stress scenarios
• Commitments were signed for Serbia, Romania,
  Hungary and Bosnia-H., and clearly prove
  international banks long term interest in the
  market
• Banks in their own interest provided on-going
  funding and additional capital to all their
  subsidiaries, regardless of IMF commitments
• In some cases cash was provided to deal with
  increased withdrawals

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How were the banks affected
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Some major players in SEE were given state support

• KBC issued 3.5 bn core capital securities to
  the Belgian state 2 bn non-dilutive core
  capital to the Flemish Regional Government
• SocGen issued 1.7 bn of deeply subordinated
  notes to the French government. Further 1.7 bn
  of preferred shares / debt issued
• Erste Group raised participation capital up to
  2.7bn and agreed to issue as well 6 bn of
  Austrian government s guaranteed bonds
• Raiffeisen Group issued participation capital up
  to 1.75 bn, in the form of core capital to the
  Austrian government. RZB issued as well bonds
  guaranteed by the Austrian government
• NBG, Piraeus Bank and Eurobank EFG increased
  capital by issuing preference shares to the Greek
  state

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Going forward

• We have to get used to a lower growth plateau.
  The severity of the financial crisis and the
  ensuing recession in countries following the
  Anglo-Saxon leveraged economic growth model,
  shows that it has run its course. While some CEE
  countries will suffer an almost halving of their
  pre-crisis growth rates, they will still
  outperform relative to the old EU countries.
• Capital inflows into CEE not returning to
  pre-crisis highs as was seen after the Latin
  American debt and the Asian crisis will be a
  drag on the growth model of foreign capital
  dependent countries.
• Consumers necessity/wish to build
  (precautionary) saving will affect consumption
  patterns especially in previously overheating
  economies hit strongly by the crisis (Ukraine,
  Russia, Hungary, Romania, Bulgaria).
• Reduced availability of foreign capital for a
  consumption driven economic growth model in some
  Eastern European countries could even induce a
  shift towards productivity enhancing investment
  projects like infrastructure possibly financed
  via EU funds.
• Consequently, Eastern European economies
  convergence process has not stopped, it will
  simply take place along a slower and more
  sustainable growth trajectory.

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Emerging Europe not to return to pre-crisis
growth rates
The European Commission does not foresee a return
to pre-crisis potential growth rates for the new
Member States (BG, CZ, EE, LV, LT, HU, PL, RO)
since the impact of the crisis on capital
formation is particularly pronounced. Furthermore
labor market trends are expected to deteriorate
even further on a marked slowdown in the growth
rate of the working age population.
Source European Commission Economic Crisis in
Europe, Sep09
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CEE moderately strengthening recovery in 2011
Source EBRD ups 2010 forecasts for some
countries, recovery remains fragile, Jan10 IMF
WEO database Oct09
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Non Performing Loans pose a Problem and are
hampering Credit Growth
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Recovery of consumer confidence will take some
time
Experiences from other countries show that
recovery of consumer confidence took double the
time span the economy needed to recover !
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SEE much harder hit than CE regarding consumer
sentiment

• Consumer confidence in SEE has fallen even more
  than in the Baltics!
• 38-43 of households in RO BG expect worsening
  financial situation vs. 26-33 in PL CZ

Source GfK, Jan2010, N1000 per country
CE
SEE
Source GfK, Jan2010, N1000 per country
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Demand for loans declining sharply, saving is
in, but low possibility to save
BG, RS UA households have particular low
possibility to save
Are you planning to use the product in the next
year?
Source GfK, Jan2010, People in CEE get used to
banking services
Source GfK Hungaria, FMDS 2006-09
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Going Forward Lessons Learnt

• Banks
• Greater focus on re-alignment of the liabilities
  
• Reduction of wholesale funding and dependency on
  FX funding
• Focus on loan to deposit ratio given the
  constraints in many countries
• Stand-by facilities from parent banks a must
• On-going management of assets necessary
• Restructuring standards and regulatory framework
  
• Tighter credit standards
• Development of LCY funding and lending markets
• There will be a greater differentiation between
  countries - banks are re-aligning their business
  models with a greater focus on risks, including
  currency risk and regulatory risk
• Adequate capitalisation necessary
• Macro-Economic Policy
• Greater focus has to put on containing
  imbalances that could lead to a repeat of the
  current crisis
• These include reining in budget deficits,
  current account deficits, a credible exchange
  rate policy, creating an environment that
  allows for development of a LCY funding market
  and supporting the use of the LCY as legal
  tender