RIGA - Eastern Europe's economic recovery remains at risk from a banking crisis as a lack of transparency in the industry continues to undermine confidence and is interfering with interbank lending, says European Bank for Reconstruction and Development Chief Economist Erik Berglof, reports Bloomberg. Emerging Europe's banking system is "not out of the woods" and "there's still a chance" the region may suffer a financial crisis, added Berglof.
Since the global financial crisis hit, the EBRD has worked to persuade Western banks to stay invested in the region and help fill a funding hole it estimates at 140 billion euros. Preventing a second banking crisis is "the absolute key" to a recovery in the region, Berglof said.
He warns that "There are some signs that demand will go up in Western Europe, and that will help these countries, but the biggest threat is a deterioration of the financial system again."
Global efforts to fix the financial system, some believe, are not working. Joseph Stiglitz, the Nobel Prize-winning economist, said on Sept. 14 that in the U.S. and many other countries, banking system "problems are worse than they were in 2007, before the crisis."
The EBRD has been focusing on 12 Western parent banks that it pinpointed as "systemically important" for Eastern Europe, including units of Italy's UniCredit, Societe Generale, as well as some large local banks, such as Latvia's Parex Bank.
Swedbank has told investors it will hold its second rights offer in less than a year in plans to raise 15.1 billion kronor (1.4 billion euros) to beef up its balance sheet, reports news agency LETA. On Aug. 17 the bank said that it planned to sell new shares to shore up reserves and help it exit the Swedish government's bank support plan. The bank, which raised 12.4 billion kronor from shareholders in 2008, has relied on Swedish state guarantees to back its borrowings since credit markets seized up last year.
"There are big questions about western European banks' portfolios and a lot of those uncertainties are tied to investments in Eastern Europe," Berglof said. "When banks don't trust each other, the interbank market doesn't work and they are cautious about lending to clients. When there are pressures at the center of these banks, it's typically in the periphery that they withdraw. That's the same fear that we had in the spring."
The European Commission warned in June that Latvia's Swedish lenders, Swedbank and SEB, may be redeeming debt to their Baltic units, which would threaten to undermine the effectiveness of the country's international bailout plans. Both banks denied the claims, and the Commission and the IMF said that the lenders had "reaffirmed" their commitment to Latvia in a Sept. 11 meeting.
Europe's banks would benefit from more rigorous stress testing, with results made public, said Berglof. That would strengthen confidence and encourage interbank lending in the region.
In July the IMF proposed that stress tests should involve "suitable disclosure, recapitalization measures to address the problem of impaired assets and resolution of unviable financial institutions."
"The stress testing exercises that are going on inside the EU - it's absolutely critical that that information comes out, and if there are problems it has to be combined with measures to address those problems," Berglof said. "That needs to happen in the next couple of months. Any effort made to get greater clarity over Western European banks, and the parts of these banks that are in Eastern Europe, that's the No.1 priority."
The EBRD will probably in October raise its 2010 growth forecasts for the 30 economies it works with, says Berglof. The EBRD predicted in May that the region's economies will grow at a rate of 1.4 percent next year, after contracting more than 5 percent in 2009.
"We do see some more potential for next year," he said. "We are more optimistic now than we were. The region is very dependent on what's happening in Western Europe, and the situation seems to have stabilized" there. Even so, the risk of a protracted crisis in the region's financial sector is holding back the pace of the potential recovery, he said.
"We are not confident that there will be a very strong, V- type recovery," said Berglof. "We are thinking in terms of a fragile, drawn out recovery reflecting the problems in the financial system both in Western Europe and in Eastern Europe. That is putting a lid on our expectations."
