A renewed effort to protect East European banks

Credit shortage could stall growth in fragile markets

FRANKFURT - A group of officials and bankers who helped prevent Eastern Europe from being thrown into the financial crisis in 2009 has reconvened, seeking to avoid a credit squeeze and economic downturn caused by problems at parent banks in Western Europe.

The International Monetary Fund, European Commission, World Bank, and other institutions this week formally revived an effort known as the Vienna Initiative, which three years ago succeeded in preventing panicked West European banks from draining capital from their East European subsidiaries.

Vienna Initiative 2.0, as it has been named, is concentrating on ensuring that national regulators do not work at cross purposes, inadvertently provoking a flight of capital as banks respond to pressure to reduce risk.


The first Vienna Initiative “was based on voluntary commitment by banks,’’ said Otilia Simkova, an analyst at the consulting firm Eurasia Group in London. “Now it seems everything is focusing on regulators.’’

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Problems among euro area banks can quickly spread east: Banks in the eurozone supply 80 percent of the foreign lending in emerging Europe, which includes countries like Poland, Hungary, and Turkey.

In fact, West European banks drained $35 billion from the region in the third quarter of 2011, according to figures published this week by the Bank for International Settlements in Basel, Switzerland.

A shortage of credit would undercut growth while countries like Romania are still recovering from the last crisis.

“There is no question things were very serious in the second half of last year,’’ said Erik Berglof, chief economist at the European Bank for Reconstruction and Development, another of the institutions taking part in the Vienna Initiative.


Representatives of the IMF, the reconstruction and development bank, and other institutions met in Brussels on Monday and Tuesday, with managers of commercial banks joining in on Tuesday. The group issued a statement late Tuesday setting out principles designed “to avoid disorderly de-leveraging in emerging Europe.’’

In what bankers said was a positive sign, Austrian bank supervisors on Wednesday eased pressure on their country’s banks to reduce their exposure to risk in Eastern Europe. Banks had complained that rules proposed last year would have forced them to curtail lending to the region.

A spokesman for the Austrian Financial Market Authority, Klaus Grubelnik, said it was a coincidence that the announcement of milder rules came a day after the Vienna Initiative meeting. But the action provided an example of what Vienna 2.0 hoped to achieve, namely preventing regulators from trying to protect their domestic banking systems at the expense of other countries.

The participants hope to agree on concrete proposals within six months, said Mark Allen, senior regional resident representative for Central and Eastern Europe at the IMF.

“Everyone agrees this was a good idea, but it’s going to be hard work,’’ he said.