1st Bank of Greece Workshop on Economies of Eastern European and Mediterranean Countries

The Global Financial Crisis and SEE:Lessons for Macro-economic Policy and Financial Stability

Market Response – The Commercial Bank’s View

Nandita Reisinger-ChowdhuryRZB AG

Head – Country Risk & Portfolio Management

2

The Global Financial Crisis

September 2008The collapse of Lehman Brothers had a particularly strong impact on CEE & SEEMassive widening of CDS spreadsCollapse in inter-bank fundingSome countries were faced with deposit withdrawalsCurrencies came under massive pressure

November 2008International Financial Institutions begin to provide support to countries in need

April 2009G-20 Summit marked a vital turning point for CEE‘s economies and banking

sectors Tripling of IMF Resources to USD 750bn, Doubling EU financial aid to CEE to USD 50bn, New flexible IMF Credit Line, World Bank resources

Central banks loosened monetary policy

Major players in CEE showed their commitment to the region; Vienna Initiative!

3

5-yr Sovereign CDS Spreads Pre-Crisis to Today

0

200

400

600

800

1000

1200

30.0

6.20

08

30.0

7.20

08

30.0

8.20

08

30.0

9.20

08

30.1

0.20

08

30.1

1.20

08

30.1

2.20

08

30.0

1.20

09

28.0

2.20

09

30.0

3.20

09

30.0

4.20

09

30.0

5.20

09

30.0

6.20

09

30.0

7.20

09

30.0

8.20

09

30.0

9.20

09

30.1

0.20

09

30.1

1.20

09

30.1

2.20

09

30.0

1.20

10

28.0

2.20

10

30.0

3.20

10

Poland

Hungary

Czech Rep.

Lithuania

Romania

Bulgaria

Croatia

Russia

4

Unsustainable Growth model came to a sharp stop

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

ALBANIA

BOSNIA-H

ERZEGOVINA

BULGARIA

CROATIA

ROMANIA

SERBIA

CZECH REPUBLI

C

HUNGARY

POLAND

SLOVAKIA

SLOVENIA

BELARUS

RUSSIAN F

EDERATION

UKRAINE

2007 2008 2009 2010 2011

GDP Growth Rates 2007 - 2011

5

Widening Current Account Deficits

-30,0

-25,0

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

ALBANIA

BOSNIA-H

ERZEGOVINA

BULGARIA

CROATIA

ROMANIA

SERBIA

CZECH REPUBLI

C

HUNGARY

POLAND

SLOVAKIA

SLOVENIA

BELARUS

RUSSIAN F

EDERATION

UKRAINE

2007 2008 2009 2010 2011

6

Substantial Financing Requirements

-80,00

-60,00

-40,00

-20,00

0,00

20,00

40,00

60,00

BOSNIA-H

ERZEGOVINA

BULGARIA

CROATIA

ROMANIA

SERBIA

CZECH REPUBLI

C

HUNGARY

POLAND

BELARUS

RUSSIAN F

EDERATION

UKRAINE

2007 2008 2009 2010 2011

7

Emergency Programmes became necessary

•IMF Stand-by in total of USD 60bn to Serbia, Bosnia, Hungary, Latvia, Ukraine and Romania •IMF Short-term Credit Line to Poland amounting to USD 20.5bn•EU BoP assistance to Hungary EUR 20bn, Latvia EUR 7.5bn and Romania EUR 20bn•EBRD, the EIB and the World Bank have been increasing their financial support to the region

•Banks signed bilateral agreements with the local Central Banks to keep their global cross- border exposure to specific countries constant and to participate in Central Bank stress testing exercises and commit to high capital ratios for the subsidiaries even under stress scenarios

•Commitments were signed for Serbia, Romania, Hungary and Bosnia-H., and clearly prove international banks long term interest in the market

•Banks in their own interest provided on-going funding and additional capital to all their subsidiaries, regardless of IMF commitments

•In some cases cash was provided to deal with increased withdrawals

8

How were the banks affected

Pre-Crisis Market Share of Foreign Banks

2003 vs. 2008

0

10

20

30

40

50

60

70

80

90

100

CZ HU PL SI SK AL BG BH HR RO SR BY RU UA

2004 2008

9

Some major players in SEE were given state support

• KBC issued €3.5 bn core capital securities to the Belgian state + €2 bn non-dilutive core capital to the Flemish Regional Government•SocGen issued €1.7 bn of deeply subordinated notes to the French government. Further €1.7 bn of preferred shares / debt issued•Erste Group raised participation capital up to €2.7bn and agreed to issue as well €6 bn of Austrian government’ s guaranteed bonds•Raiffeisen Group issued participation capital up to €1.75 bn, in the form of core capital to the Austrian government. RZB issued as well bonds guaranteed by the Austrian government•NBG, Piraeus Bank and Eurobank EFG increased capital by issuing preference shares to the Greek state

10

Going forward

• We have to get used to a “lower growth plateau”. The severity of the financial crisis and the ensuing recession in countries following the Anglo-Saxon leveraged economic growth model, shows that it has run its course. While some CEE countries will suffer an almost halving of their pre-crisis growth rates, they will still outperform relative to the “old EU countries”.

• Capital inflows into CEE not returning to pre-crisis highs – as was seen after the Latin American debt and the Asian crisis – will be a drag on the growth model of foreign capital dependent countries.

• Consumers’ necessity/wish to build (precautionary) saving will affect consumption patterns especially in previously overheating economies hit strongly by the crisis (Ukraine, Russia, Hungary, Romania, Bulgaria).

• Reduced availability of foreign capital for a consumption driven economic growth model in some Eastern European countries could even induce a shift towards productivity enhancing investment projects like infrastructure – possibly financed via EU funds.

• Consequently, Eastern European economies’ convergence process has not stopped, it will simply take place along a slower and more sustainable growth trajectory.

11

Emerging Europe not to return to pre-crisis growth rates

Source: European Commission – Economic Crisis in Europe, Sep09

The European Commission does not foresee a return to pre-crisis potential growth rates for the new Member States (BG, CZ, EE, LV, LT, HU, PL, RO) since the impact of the crisis on capital formation is particularly pronounced.

Furthermore labor market trends are expected to deteriorate even further on a marked slowdown in the growth rate of the working age population.

12

CEE moderately strengthening recovery in 2011

Source: EBRD ups 2010 forecasts for some countries, recovery remains fragile, Jan10; IMF – WEO database Oct09

13

Non Performing Loans pose a Problem and are hampering Credit Growth

0

5

10

15

20

25

30

35

Albania Bosnia Bulgaria Croatia Hungary Poland Romania Serbia Russia Ukraine

2005 2006 2007 2008 2009

14

Recovery of consumer confidence will take some time

Experiences from other countries show that recovery of consumer confidence took double the time span the economy needed to recover !

15

SEE much harder hit than CE regarding consumer sentiment

Consumer confidence in SEE has fallen even more than in the Baltics!

38%-43% of households in RO & BG expect worsening financial situation vs. 26%-33% in PL & CZ

Source: GfK, Jan2010, N=1000 per country

Source: GfK, Jan2010, N=1000 per country

SEE

CE

16

Demand for loans declining sharply, saving is “in”, but low possibility to save

Are

you

pla

nn

ing

to u

se t

he p

rod

uct

in t

he n

ext

year?

Source: GfK Hungaria, FMDS 2006-‘09

Source: GfK, Jan2010, “People in CEE get used to banking services”

BG, RS & UA households have particular low possibility to save

17

Going Forward – Lessons Learnt

•Banks Greater focus on re-alignment of the liabilities Reduction of wholesale funding and dependency on FX fundingFocus on loan to deposit ratio given the constraints in many countriesStand-by facilities from parent banks a must

On-going management of assets necessaryRestructuring standards and regulatory framework Tighter credit standardsDevelopment of LCY funding and lending markets There will be a greater differentiation between countries - banks are re-aligning their

business models with a greater focus on risks, including currency risk and regulatory riskAdequate capitalisation necessary

•Macro-Economic PolicyGreater focus has to put on containing imbalances that could lead to a repeat of the current

crisisThese include reining in budget deficits, current account deficits, a credible exchange rate

policy, creating an environment that allows for development of a LCY funding market and supporting the use of the LCY as legal tender