Graham Stack in Bucharest -

At the start of the year, the foreign owners of banks in many parts of Central and Eastern Europe found themselves in a classic 'prisoner's dilemma', the game theory scenario where cooperation between the players is the best strategy, but defection the most likely outcome.

"Nobody knew which of the foreign-owned banks would start pulling out first, and nobody wanted to be the last one left," recalls Steven van Groningen, CEO of Raiffeisen Romania. "So what the International Monetary Fund and European Bank for Reconstruction and Development did was to get the main foreign banks to come together in Vienna and reach a gentleman's agreement between them and with the international financial institutions."

The resulting "Vienna Initiative" meant that Romania's €20bn euro stand-by agreement with the IMF reached in March was flanked by an IMF-coordinated agreement between the parent banks of the nine largest local banks, including Raiffeisen International, which account for 70% of assets in the Romanian banking system. The banks pledged to maintain their overall exposure to Romania and even to provide additional capital if need be. The policy was then duplicated in Serbia, Bosnia-Hercegovina, Hungary and Latvia. And on November 18, the IMF announced that those nine banks reaffirmed their commitment to maintain their exposure to Romania and ensure adequate capital levels over 10 percent for their affiliates.

"Yes, it has been a success," says van Groningen. "It created stability that has meant above all that IMF loans have gone to solve the balance of payments crisis and finance deficit spending rather than funding bank recapitalization. In fact, according to the results of the stress test we underwent, Raiffeisen Romania did not even require recapitalization in the end."

Raiffeisen Romania has stayed in the black to date in 2009, posting first-half net earnings of €52.6m, though that was down from €71m in first half of 2008. Van Groningen ascribes this relative success to the bank's pioneering role in consumer lending in Romania and consequent larger market share. "If you have a dominant market share, you can afford to be more conservative and focus on profitability and efficiency, than banks who are rushing to catch up. So we did not participate in the more egregious excesses of the two years before the crisis. Our deposit/loan ratio was 100:130, whereas some banks had 100:450."

"There will be no return to that model of economic growth fuelled by borrowing and consuming, attracting money from abroad without a deposit base," warns van Groningen. "Lending levels will never reach those seen two or three years ago. Lending will have instead to focus on measures that improve productivity."

Lending in limbo

Van Groningen shows admirable sang froid in the face of the current political crisis in Romania, uncertain presidential election outcome and budget funding dilemma following the IMF's decision to defer payment of a third tranche from its stand-by loan. "Banks who have been a long time in Romania like us don't get scared off by something like this. The most important thing is that we get a government with a clear course. Exactly what course does not matter so much as simply knowing what the course is. If parliamentary elections are needed following the presidential elections to make the country more governable, so be it, providing it is done as quickly as possible."

The governor of the National Bank of Romania, Mugur Isarescu, has called on banks to lower interest rates on loans to ease the economic recovery, following his base rate cut of 50 basis points in September. Van Groningen, however, points out that current high interest rates have also to do with high risk management costs - connected with political instability - as well as rising administrative costs, such as the obligation to provide monthly paper bank statements. Slow rates of lending, says Van Groningen, are anyway generally linked not so much to the high cost of borrowing than to crisis-induced lack of demand for credit.

Raiffeisen also has some objections over the apparent tacit condoning by the authorities of debtors who default on loans they could in fact service. "The 10% of bad debtors makes borrowing more expensive for the 90% conscientious borrowers," he warns.

As of August, Raiffeisen had non-performing loans (NPLs) below the system average of 13.3%. "NPLs don't necessarily mean losses if you have done your risk management right," points out van Groningen.

With 50% of its loan book denominated in foreign currency, further weakening of the lei would likely worsen Raiffeisen's NPL figure. However, Van Groningen does not see "any fundamental reasons" for further devaluation of the lei, although the bank did register that deposits in euros in October grew faster than in lei for the first time. "This could indicate uncertainty in the currency, but it could also be just a decision to shift on the part of a few very large depositors," he says.

Raiffeisen is one of the banks the government will now be forced to turn to in order to fund its enormous budget deficit after the IMF backed out of disbursing the third €1.5bn tranche of stand-by funding. "We are in constant talks with the government," confirms van Groningen. Raiffeisen already participated in a club loan in July, where eight banks loaned the state €1.2bn at 5%.

Analysts now predict lei treasury yields exceeding 10%. High yields, however, could be the result not just of risk, but also the government's abstinence from domestic borrowing during the years of plenty and thus the lack of a yield curve. The government's now-urgent borrowing needs, analysts fear, could crowd out lending to the economy, nipping economic recovery in the bud. "But lending to the government is not really what we are here for," says van Groningen. "You don't need an extensive branch network to do that. All you need is an office and a telephone."