Romania Among Most Vulnerable Countries If Euro Zone Banks Repatriate Capital

10.27.2011 By Razvan Voican

Romania is the fourth most vulnerable country if euro zone banks decide to cut their exposure, with debts to such lenders amounting to around 38% of GDP, according to an analysis of UK’s Barclays based on data from the Bank of International Settlements.

The most vulnerable country is Hungary, whose debts to European banks near 80% of GDP, followed by the United Kingdom and by Poland, a long distance behind, with 40% of GDP.

According to estimates of the European banking authority, banks in the euro zone would need around EUR100 billion in additional capital. But where should they get this money from and at what costs?

The previous capital increases conducted over the last three years have shown how difficult it is to collect money from existing shareholders and from the capital market, this is why countries or shareholders outside Europe came to be involved.

Barclays analysts believe under these circumstances that one of the options to be considered by banks is to reduce exposure to other markets by adjusting balance sheets.

"Anecdotal evidence suggests that several European banks [repatriated capital] last week but there is little hard evidence."

Statistical data on the degree of vulnerability show the consequences that the banking model used in the last decade on the main markets in the region have had, with banks in the euro zone occupying dominant positions and feeding the hunger for financing with cheaper Western funds. Romania got dragged in later than Hungary and Poland, and the crisis put an end to the lending spiral, but even so it was enough for it to develop a dramatic dependence on euro zone banks.

The only element supporting Romania in its relationship with some foreign banks is the fact that some degree of mutual dependence has been created, and the strongest example is that of the connection created between Romania and Austrian bank Erste Group, which controls BCR and rivals Societe Generale for the position of largest financer of the state budget.

In other words, if Austrian banks Erste and Raiffeisen decided to withdraw their money from Romania, it would severely compromise their own business. On the other hand, when it comes to much larger banking groups, such as Societe Generale and UniCredit, Romanian banking operations have a much lower share of their businesses, so in extreme situations, were they to give up Romanian operations, it would not have as strong an impact as in the case of Austrian banks.

On the other hand, the 2009 experience shows that the main foreign banks have not withdrawn significant amounts from Romania, but at the time the Vienna agreement was in place, which functioned based on a code of honor under the watchful eye of the European Commission and of the IMF.

This time it would be a matter of retaining exposure to the entire region, requested by leaders of the entire European Union.

In 2009, the IMF and the European Commission endorsed an agreement whereby the National Bank of Romania (BNR) released banks' funds from the minimum reserve requirements, with the banks investing the money in government bonds and other instruments of the Finance Ministry in order to support the budget and refinance the public debt.

It remains to be seen what kind of stimulant it could receive now to commit to keeping its exposure to the entire region.

Market sources say talks with the IMF on reviving the Vienna agreement are not on the agenda, and the Romanian authorities have not yet asked for its support in this regard.

(English version by Daniela Stoican)