Eastern Europe remains at risk of a credit squeeze as western lenders cut funds to meet capital rules even after the European Central Bank’s discount loans, the European Bank for Reconstruction and Development said.
The euro region’s debt crisis spread to the continent’s east through trade and banking links, hindering the recovery of Europe’s emerging economies from a slump in 2009. While the ECB’s 489 billion euros ($656 billion) of three-year loans have helped avoid “a major disaster,” growth is slowing and credit remains scarce, said Piroska Nagy, an EBRD economist.
“We aren’t getting into a euphoric mood about the ECB’s measures,” Nagy, director of country strategy and policy at the EBRD in London, said in a phone interview yesterday. “We are very happy that finally the ECB did what a central bank is supposed to do. But because of the growth developments, the capital-flow developments and the trade-finance developments, we are very cautious to claim that we are out of the danger zone.”
Eastern European financial markets have rebounded this year on expectations the decline in euro-region growth will be less severe. The U.S. Federal Reserve’s pledge to keep interest rates near zero through at least late 2014 also helped steer investors toward the region’s higher yields, while the ECB’s longer-term refinancing operation in December improved funding conditions for western European lenders.
The Hungarian forint is the world’s best performer this year, having gained 8.6 percent against the euro, after being the second-worst performer in the second half of last year behind the Belarusian ruble. The Polish zloty is the second-best, up 6.8 percent, from the third-worst in the last two quarters.
“We are all relieved that that very important monetary zone does have a central bank,” Nagy said. “Whether this will translate into stabilization and a sustained improved outlook, I am not sure.”
Western European lenders including UniCredit SpA, Erste Group Bank AG and Societe Generale SA, which control about three-quarters of the region’s banking industry, are selling assets and raising capital to meet more stringent requirements, curtailing credit to households and businesses in the east.
The ECB is planning a second-round of longer-term refinancing operations on Feb. 29.
“The ECB’s LTRO has been absolutely fundamentally important to avoid basically a collapse,” Nagy said. “But banks do continue deleveraging. And it is to continue because adjustment of balance sheets is necessary.”
Funding conditions are still deteriorating in central Europe, the Baltic economies and the Balkan nations, while Poland appears to be more insulated because of stronger economic growth and increasing local deposits, according to a draft report by the EBRD, seen by Bloomberg.
The Polish economy may grow 2.5 percent this year, the fastest pace in the European Union, the European Commission forecast yesterday. Hungary’s economy will shrink 0.1 percent and the Czech Republic will stagnate, the commission said.
Bank-related capital outflows from emerging Europe were “substantial” in the second part of last year, the EBRD said. Hungary’s outflows accelerated last year and even Poland was affected, with net outflows totaling 2 percent of economic output between July and November last year, according to data compiled by the EBRD.
This deleveraging is spilling over into deteriorating credit conditions, the EBRD said. Credit availability is declining in Lithuania and Hungary, while Poland and Slovakia maintained “modest” credit growth, according to the development bank.
Another channel of contagion from western European banks shrinking their balance sheets is a shortage of trade finance for the continent’s east, Nagy said.
“Many countries in emerging Europe are small countries, very open, which routinely use trade finance,” she said. “Developments in trade finance are also pretty bleak.”
As much as half of trade-finance products offered by banks worldwide come from euro-area banks, according to data from the EBRD. As they focus on repairing balance sheets, these banks are reducing these products, Nagy said.
While in emerging Asia and Latin America, local lenders are able to step in and “pick up the slack,” in emerging Europe the withdrawal of western European lenders from trade finance leaves a gap, she said.