Austria implements the "anti-Vienna Initiative"

By bne IntelliNews November 22, 2011

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Economic growth prospects across the region were hit on November 21 with the news that many of the biggest banks in CE and SEE will be forced to survive on their own funds next year. That's because Austria, in a bid to protect the country's 'AAA' rating, has introduced new regulations to limit the volume of loans their parent banks can make to them.

The move will worry economists across the region, with reports in Central Europe and Southeast Europe already suggesting that clients are starting to struggle to access credit lines from the banks due to raised risk via the sovereign debt crisis in Europe and the need for capital due to new capital ratios. That puts economic growth - already seen as slumping next year - at even greater risk.

As contagion of core Europe from the PIIGS has become a major concern in recent weeks, Austria has not escaped, with concern over the possibility that the government may need to ride to the rescue of the banks weighing on the country's 'AAA' sovereign-credit rating and raising the country's refinancing costs last week, with the spread on its 10-year bonds accelerating to 191 bps, reports Bloomberg.

The news also illustrates the lack of diversity in the region's banking sector, with Erste Group, Raiffeisen Bank International, and Bank Austria (itself owned by UniCredit Group) the biggest lenders in CE and SE. They will now be prevented from lending significantly more than they raise in local deposits in countries across the region starting next year, the Austrian central bank said in a statement on November 21.

The order throws a real spanner in the works, given that European officials have spent the last few months pontificating about how to protect bank funding to subsidiaries in the markets to the east of the continent - whose banking sectors are heavily foreign owned. During the last crisis, the banks agreed not to pullback from emerging Europe in what came to be known, ironically enough, as the "Vienna Initiative". However, some analysts suggest that the motivation for the banks to act in the same manner is not as strong this time around, with less market share to be pursued in CE and SE now.

"This is certainly going to affect the availability of credit," Christian Keller, head of emerging EMEA research at Barclays Capital in London, told Bloomberg. "There's also going to be more differentiation, which will put pressure on countries like Hungary, Romania, Ukraine or Bulgaria."

Ewald Nowotny, governor of the Austrian central bank, said, "this set of measures will provide a sustainable growth model" that will help avoid "pronounced boom-bust cycles," claiming that the new measures will "benefit the stability of the local financial markets [and] Austria's exposure to this region will also become more sustainable."

The banks have historically funded loans in many of the countries in the region with money from their home bases, allowing them to lend more than they raise in local deposits. Erste has lent almost double the volume of deposits it has attracted in Hungary, 1.4 times in Romania and 1.5 times in Croatia, according to its latest quarterly report. Raiffeisen's loan-to-deposit ratio profile in the region looks similar.

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