beyondbrics

Commerzbank is Germany’s leading bank in central and eastern Europe. So its move on Friday to freeze new loans outside Germany or Poland will have sent a chill through the region.

Banks have trimmed their balance sheets in the more vulnerable CEE countries before, notably in 2008-09. But Commerzbank’s public announcement of a “temporary suspension of new loan business without connectivity to Germany or Poland… with immediate effect” will multiply fears of a coming credit crunch.

Commerzbank boasts of 60 locations in 50 countries, including in Georgia, where it opened its newest representative office in Tbilisi only two weeks ago.

Clearly, the bank will continue to offer a range of services in most of these places, even if it can’t extend new credits. But today’s world has no lack of bankers offering advice. It’s those that are ready and willing to lend money that are in short supply.

As James Wilson reported in the FT, Commerzbank is responding to European Union rules  for stricter capital requirements for European banks the fallout from the eurozone crisis. Germany’s second-largest bank by assets revealed a quarterly loss for the period to the end of September after writing down almost €800m ($1.1bn) of Greek exposure.

In a report published just before Commerzbank’s announcement, Peter Attard Montalto of Nomura warned that emerging Europe will be hit by eurozone banks’ needs to boost their capital-to-assets ratios.

We see deleveraging as having a pretty minimal effect on Turkey, Russia and Poland given both the sizes of potential asset sales involved and also the more favourable domestic banking market dynamic. But we see a more worrying effect on South Eastern Emerging Europe (particularly Bulgaria, Serbia and Romania) as well as Hungary given both the sizes of assets involved and the more stressed market dynamic.

Attard Montalto says that assets sales may be more likely in the more liquid markets of the eurozone, the US and the Middle East. But “the downside risks are large, especially on increased chances of a disorderly Greek default or yet more Italy and Spain writedowns being required”.

However, governments can take action – either by cooperating through a repeat of the Vienna Initiative of 2009 or through “domestic measures like capital controls, use of reserves and potential nationalisation as adding to the backstop against a disorderly impact on Emerging Europe”.

Attard Montalto estimates that some €13bn of deleveraging could hit emerging Europe. That doesn’t sound like much when compared to the €1,200bn that the eurozone banks would have to shed if they were to achieve the required new capital ratios solely through balance sheet reductions.

But because the cuts will not fall evenly and because there is a risk of more disorder in the markets possible forcing banks into emergency action, the impact on individual countries may be much bigger.

Inevitably, it is the countries that already have difficulties that are more likely to be clobbered. And they will find it harder than others to secure alternative sources for finance. For example, a eurozone bank selling assets in the dynamic Polish market won’t be short of potential buyers, with, say, Russian banks on the look-out.

But in Hungary, where bankers are furious with the government for intervening in the mortgage market, would-be investors are as rare as swallows in a cold Budapest winter. Italy’s Banco Popolare has yet to find a buyer for Hungarian operations it put up for sale in January.

This Nomura chart shows how much of their external exposure eurozone banks have to CEE, with Greece, Austria and Italy far ahead of the pack:

And this table (click for large version) gives Nomura’s best estimates of the impact of possible deleveraging in specific CEE countries:

The potential credit crises come not with orderly actions – such as Commerzbank’s new loan freeze – but with the shock fire-sales of assets in countries where there are no buyers.

The best  outcome is an orderly reduction in new loans with the EU and the International Monetary Fund stepping in to support the most vulnerable countries – as happened in 2008-9.  The worst is a string of banks abandoning CEE under pressure from a growing crisis in the eurozone that sucks in Italy and Spain as well as Greece.

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