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 – The Commercial Bank’s View
Nandita Reisinger-Chowdhury
RZB AG
Head – Country Risk & Portfolio Management
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 CEE‘s 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
Major players in CEE showed their commitment to the region; Vienna Initiative!
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30.03.2010
28.02.2010
30.01.2010
30.12.2009
30.11.2009
30.10.2009
30.09.2009
30.08.2009
30.07.2009
30.06.2009
30.05.2009
30.04.2009
30.03.2009
28.02.2009
30.01.2009
30.12.2008
30.11.2008
30.10.2008
30.09.2008
30.08.2008
30.07.2008
30.06.2008
5-yr Sovereign CDS Spreads Pre-Crisis to Today
1200
1000
800
Poland
Hungary
Czech Rep.
600
Lithuania
Romania
Bulgaria
Croatia
400
Russia
200
0
2
Unsustainable Growth model came to a sharp stop
GDP Growth Rates 2007 - 2011
15,0
10,0
5,0
0,0
N
BA
L
A
IA
Z
ER
-5,0
H
IA
SN
BO
N
VI
O
G
E
A
AR
G
L
BU
IA
CR
AT
O
IA
RO
IA
AN
M
R
SE
A
BI
CZ
H
EC
R
U
EP
IC
BL
HU
Y
AR
G
N
ND
LA
PO
KI
VA
O
SL
A
N
VE
O
SL
IA
R
LA
E
B
RU
I
SS
US
AN
R
DE
E
F
I
AT
N
O
I
RA
K
U
NE
-10,0
-15,0
-20,0
2007
2008
2009
2010
2011
3
RU
2007
SS
I
FE
CH
AN
CZ
E
-5,0
2008
BL
IC
BI
A
2009
2010
IA
A
AT
I
NE
O
N
US
UK
RA
I
DE
R
BE
LA
R
SL
O
VE
N
SL
O
VA
KI
PO
LA
ND
NG
AR
Y
EP
U
HU
R
IA
M
AN
IA
O
AT
SE
R
RO
CR
BO
AL
SN
BA
IA
N
-H
IA
ER
ZE
G
O
VI
N
A
BU
LG
AR
IA
Widening Current Account Deficits
10,0
5,0
0,0
-10,0
-15,0
-20,0
-25,0
-30,0
2011
4
RU
2007
SS
I
FE
CH
AN
CZ
E
-20,00
2008
BL
IC
BI
A
2009
2010
AT
I
NE
O
N
US
UK
RA
I
DE
R
BE
LA
R
PO
LA
ND
NG
AR
Y
EP
U
HU
R
IA
M
AN
IA
O
AT
SE
R
RO
CR
A
IA
G
O
VI
N
BU
LG
AR
BO
SN
IA
-H
ER
ZE
Substantial Financing Requirements
60,00
40,00
20,00
0,00
-40,00
-60,00
-80,00
2011
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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 crossborder 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
market
banks long term interest in the
•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
Pre-Crisis M a rk et Sha re of Foreign Ba nk s
2 0 0 3 vs. 2 0 0 8
100
90
80
70
60
50
40
30
20
10
0
CZ
HU
PL
SI
SK
AL
2004
BG
BH
HR
RO
SR
BY
RU
UA
2008
7
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
10
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
35
30
25
20
15
10
5
0
Albania
Bosnia
Bulgaria
Croatia
Hungary
2005
2006
Poland
2007
2008
Romania
Serbia
Russia
Ukraine
2009
12
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,
N=1000 per country
CE
SEE
Source:
GfK, Jan2010,
N=1000 per country
14
Demand for loans declining sharply,
saving is “in”, but low possibility to save
Are you planning to use the product in the next year?
BG, RS & UA households have particular low possibility to save
Source: GfK Hungaria, FMDS 2006-‘09
Source: GfK, Jan2010, “People in CEE get used to banking services”
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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
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,
development of a LCY funding market and supporting the
use of the LCY as legal
tender
creating an
greater focus on risks, including
environment that allows for
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