Graham Stack in Kyiv -
With the Ukrainian economy in freefall, Austria's Raiffeisen International, owner of Ukraine's second-largest bank Raiffeisen Bank Aval, has taken the lead in calling for an EU support package for troubled Eastern European economies.
"If a country goes from an economic forecast of plus 7% to minus 5% in a short space of time, even if that country is not an official EU candidate, we think that a country the size and strategic position of Ukraine should get EU support to avoid a total collapse of the financial system, and consequently of the real economy," argues Raiffeisen Bank Aval's deputy CEO, Gerhard Boesch.
"It is Raiffeisen's position that there should be action on a European basis to prevent such a collapse," adds the Austrian. "The IMF package [for a $16.5bn standby loan agreed early November] is simply no longer enough to guarantee even relative stability, because the situation has changed so dramatically in the last three months."
Head of Raiffeisen International, Herbert Stepic, has assembled a powerful lobbying group calling for EU support for Central and Eastern European countries - both EU and non-EU. As well as Raiffeisen, the group includes Italy's UniCredit Group and Intesa Sanpaolo, Austria's Erste Bank, SociÃ©tÃ© GÃ©nÃ©rale from France, Belgium's KBC, German Bayern Landesbank, Sweden's Swedbank and SEB, and EFG Eurobank from Greece. At the recent Davos Economic Forum, the financier George Soros also voiced his support for the initiative.
However, such arguments have been largely rejected in Brussels. The European Commission and the European Bank of Reconstruction and Development have acknowledged the extent of the crisis in the emerging markets of Europe, but said it's the responsibility of the foreign parent banks themselves, backed by their national governments, to support their subsidiaries. However, Boesch counters that, "if a country like Ukraine can be stabilized, then it is in the interests of all Europe."
According to Boesch, the loan exposure of Austrian banks, including Bank-Austria owned UniCredit, to the CEE region is around €180bn. "This is roughly two-thirds of Austrian GDP," he points out. Countries at risk account for around 40% of the exposure, says Boesch, with Ukraine the most threatened.
Acknowledging such support is unlikely to be popular in the EU, Boesch points out that Western national bank bailouts have also been unpopular, but they have been seen as necessary. "The headline figure [of a support package] would look small compared to such national bank bailout packages. It's simply a fact that the parent banks cannot increase our exposure to the region at the same time as all international investors pull back. These countries, especially Ukraine, might now face a real credit crunch beyond what we have seen."
Boesch says that the parent banks are now feeling the pinch themselves. "There is no doubt that the situation for parent banks is not the same as it was. The parent banks are also affected by the crisis."
"Raiffaisen Bank Aval was very successful in raising financing 2007-2008 - from the parent company, bonds and as syndicated loans. We raised a lot of capital, and most of these 80-90 investors are very reluctant to prolong. So we will need to pay back all of these loans." Raiffeisen Bank Aval has to pay back a $500m syndicated loan in April, and $80m in June, and won't disclose private transactions.
The parent bank has provided extensive support to date with over $600m cash in the fourth quarter of 2008, so that the actual recapitalization requirement calculated by the IMF is assessed as moderate by the bank. But the parent companies in general, says Boesch, cannot replace wholesale funding that isn't rolled over. The resulting large capital outflow, as foreign currency loans are paid back, will pressure the currency, creating a vicious circle. Further depreciation will also worsen banks' asset quality. "On balance, the pure numbers are not unmanageable," says Boesch of Ukraine's finances. Ukraine has low public sector debt and a low current account deficit. "But the situation has been exacerbated by the global situation and political crisis."
Boesch makes no bones about the political mess that Ukraine is in, which has seen European enthusiasm after the Orange Revolution in the winter of 2004 turn to hand wringing. Specifically, he sees a lack of credible central bank independence as a factor in the chaotic devaluation of the hryvnia. European intervention, he argues, could help focus minds and overcome the political paralysis. "In the long term, an offer to Ukraine to become an EU candidate might be the preferable solution," believes Boesch.
Deposits at risk
Besides further hryvnia depreciation, a 'Negative' outlook from Moody's Investors Service on Ukrainian banks at the end of January identified hemorrhaging deposits as a second systemic risk. A rough total of UAH60bn, around a third of all deposits, have been withdrawn since October on deposits maturing. The situation would have been worse but for the National Bank of Ukraine imposing a moratorium on preterm withdrawal of deposits in October to stem a run on the banks. However, the IMF has called for this moratorium to be lifted, and influential chairman of the NBU advisory board, Petr Poroschenko, suggested February 1 that this could soon happen.
Boesch sees such a move as fraught with risks, despite the moratorium contradicting civil law. "Lifting the moratorium would be a risky test of the degree of nervousness among the population." Raiffeisen Bank Aval, says Boesch, has always paid out 100% of deposits in any currency on any client requesting, and could benefit from a flight to quality, with pressure on Aval deposits easing in January relative to November-December.
"But we already see other Ukrainian banks unable to pay out deposits that have expired, or current account deposits. And many more banks give you $100 a day, so it takes 3 weeks to withdraw $2,000. In other banks you can see people queuing up," he says. "If a lot of people decide to withdraw, a large number of banks are going to be in trouble. The price that would be paid then would be a rather big one."
The management of distressed assets will be an important business line in 2009, says Boesch. Raiffeisen Aval put a brake on its loan book growth in the first half of 2008, while other banks were still steaming ahead. "We lost market share as a result, with credit growth of 17% against market growth of 35%," says Boesch. But caution was rewarded when the currency collapsed.
Even so, Aval NPL figures amount to 2.7% at the end of 2008. "We are now seeing a deterioration in the ability of clients to service their debts. It's easy to see that, if the currency falls by 60-70%, a lot of customers are going to be simply unable to pay 60-70% more at the same time that the economy is going into recession, people are seeing income decrease or losing their jobs."
The bank has limited options. "Aggressive repossession would simply put huge pressure on asset prices," says Boesch. Instead, the bank hopes to draw on its extensive branch network to work with customers in restructuring loans. Staff who previously issued credits are now busy restructuring them. However, the bank will still lay off 10% of its 17,000 strong workforce.
Boesch argues that one of the systemic flaws in the Ukrainian banking has been the population's overwhelming preference for dollars over the local currency - simultaneously for both credits and deposits. "It's actually an irrational position - the population has gone long on dollar deposits, and at the same time has a huge short position in dollar credits," he points out. "It was basically an enormous carry trade, which is now just starting to unwind. The unwinding is going to take several years and be extremely painful."
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