Austrian Banks Most Exposed to Growing Russia Conflict, IMF Says

Austrian banks are the most exposed to potential losses from tougher sanctions on Russia, while Swedish, French and Italian lenders are also vulnerable, the International Monetary Fund said.

“Spillover effects from geopolitical tensions between Russia and Ukraine thus far have been mostly felt in the countries directly involved,” staff at the Washington-based IMF wrote in a report released today and dated June 25, before the latest rounds of sanctions from the U.S. and the European Union.

“An escalation of tensions through intensification of sanctions and retaliations may lead to larger spillovers across Europe, central Asia, and beyond,” the report stated.

The European Union today curbed Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet over the Kremlin’s backing of the rebellion in eastern Ukraine.

The ruble weakened for a fourth day and bonds declined as Russia canceled its second debt auction in a row. The central bank last week unexpectedly increased borrowing costs for a third time this year to tamp down inflation expectations and stop capital flight, as the threat of wider sanctions squeezes an economy the IMF sees barely growing in 2014.

Curtailing Credit

Austrian banks are the most exposed relative to bank asset size, while French, Italian and Swedish banks have “relatively larger exposures compared to other advanced economies,” according to the fund’s “Spillover Report,” which assesses the impact of countries’ economic policies beyond their borders. If in difficulty, Austrian banks could curtail credit to emerging European markets, fund staff wrote.

“As Russian and Ukrainian credit quality deteriorates, banks with credit exposures will be faced with increased risks of default,” according to the report.

Raiffeisen Bank International AG, Societe Generale SA, UniCredit SpA, OTP Bank Nyrt. and Nordea Bank AB are the most vulnerable European banks to the political tensions, Goldman Sachs Group Inc. analysts wrote in a note to clients last week. The IMF didn’t cite any bank in today’s report.

While foreign bond holders and credit default swap underwriters are also exposed, the impact of their losses on global markets may be small, according to the IMF.

Speaking to reporters today in Washington, IMF Managing Director Christine Lagarde said the fund’s loan program to Ukraine is premised on having a resolution of the conflict on the eastern border “in the not too distant future.”

Loan Program

“For the purpose of the Ukrainian program, we are much expecting that there be a collective effort to de-escalate the conflict. And we would hope that the interested parties at large be committed to such de-escalation,” she said.

Another contagion channel is commodities, the fund said, including the case of a sharp disruption of natural-gas supplies from Russia to Europe, which depends on the country for about a third of its needs.

“The spillover implications for metals from geopolitical tensions can be observed immediately through price movements” of metals such as palladium or nickel, according to the report. Oil prices appear more immune to the conflict, it said.

In a separate report released today and dated June 26, the fund said it expects capital outflows from Russia to increase this year because of the conflict in Ukraine and as the Federal Reserve tapers its bond purchases.

“While Russia is exposed to risks of accelerated capital outflows -- especially because of exceptional geopolitical tensions -- and sudden stops of external funding, the ongoing gradual move to a flexible exchange rate and large international reserves provide substantial buffers,” the fund wrote in the study, which looked into external indicators of 29 economies.

Looking at the world economy, the IMF said a slowdown in emerging markets and the unwinding of unconventional monetary policy in advanced economies, which will lead to higher global borrowing costs, are two trends that can have broad effects on the rest of the world.

“A downside scenario of sharply tighter financial conditions alongside a further weakening of emerging-market growth would be damaging for the global economy -- lowering output by about 2 percent,” the IMF said.

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