EM bank subsidiaries should gain access to parent capital - EBRD's Mohácsi Nagy

Before her presentation Mohácsi Nagy polled the audience whether they believe the EU will go into recession next year and it turned out the outcome of the flash survey on spot was the same as the EBRD’s own projection.

She noted that in its recently issued forecast “that was exactly the feeling", namely that the EU will stagnate.

Click on the link below for the result of the poll.“The future will be very difficult in the following few years," she said.

In agreement with a poll conducted at the Budapest Economic Forum, the EBRD is projecting economic stagnation in the EU in 2012, Mohácsi Nagy said at the conference. Up to Q2 2011, the general expectation was for economic recovery to continue, however faith in this forecast has been quickly waning since then. In contrast with several other regions, emerging economies in the EU are likely to see GDP growth remain below the 2007 level next year, she noted.

With the exception of Hungary and a few other countries, lending has started to grow, however the volume of transactions has remained way below the pre-crisis level. Hidden behind the weak growth figures are massive differences in each country's credit markets, which have also been impacted by regulatory measures.

The EBRD has modified its 2012 economic growth forecast from July's 3.4% to 1.7% by now, reflecting the Eurozone crisis. As concerns the current account of the region's countries, the majority (which includes Hungary) has seen improved current accounts. International foreign currency reserves have likewise increased, and so did banks' capital adequacy levels.

Hungary's banks were no exception to the general trend of improved capital adequacy from 2007 to 2010. However it is bad news that the non-performing loan ratio has increased in each country observed, while the ratio of FX loans to total loans remains high despite the fact that banks are now predominantly lending in local currency everywhere. While regulatory measures have restricted foreign currency lending, existing loans have not been affected.

Another negative trend is the increase in government debt despite the fact that the Vienna Initiative has made bank bailouts in the region unnecessary. Without the Vienna Initiative, government debt would be much higher, Nagy emphasized. Similarly to government debt, indebtedness in the private sector is also quite high, she noted.

The financing problems of the Eurozone’s banking groups have increased over the past few years, their CDS spreads leaped. Mohácsi Nagy said the capital position of the banks is stronger today than it was before the crisis, but the debt woes of the euro area created a massive need for recapitalization for them.

The financing of the subsidiaries continues to lean greatly on parent bank funds and the local money and capital markets are still underdeveloped, she added. Compared to 2008 the banking sector can expect even bigger shocks, but they are likely to react differently.

The cross-border banking models have been doing well during the crisis, but not every bank in the same sense. The banks that were hit most severely by the crisis could go through serious restructuring, deleveraging and layoffs.

Others may need to resort to European funds (ECB, EFSF), but Mohácsi Nagy said it would be highly important that similarly to the 2009 Vienna Initiative emerging market subsidiaries could get access to the funds gained by capital hikes via Vienna Initiative II (an amended version of the original).

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