1 st 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-Chowdhury RZB AG Head – Country Risk & Portfolio Management

1 The Global Financial Crisis September 2008 The collapse of Lehman Brothers had a particularly strong impact on CEE & SEE Massive widening of CDS spreads Collapse in inter-bank funding Some countries were faced with deposit withdrawals Currencies came under massive pressure November 2008 International Financial Institutions begin to provide support to countries in need April 2009 G-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!

2 5-yr Sovereign CDS Spreads Pre-Crisis to Today

3 Unsustainable Growth model came to a sharp stop GDP Growth Rates

4 Widening Current Account Deficits

5 Substantial Financing Requirements

6 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

7 How were the banks affected

8 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

9 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.

10 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.

11 CEE moderately strengthening recovery in 2011 Source: EBRD ups 2010 forecasts for some countries, recovery remains fragile, Jan10; IMF – WEO database Oct09

12 Non Performing Loans pose a Problem and are hampering Credit Growth

13 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 !

14 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 SEE CE

15 Demand for loans declining sharply, saving is “in”, but low possibility to save Are you planning to use the product in the next 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

16 Going Forward – Lessons Learnt Banks Greater focus on re-alignment of the liabilities Reduction of wholesale funding and dependency on FX funding Focus on loan to deposit ratio given the constraints in many countries Stand-by facilities from parent banks a must On-going management of assets necessary Restructuring standards and regulatory framework Tighter credit standards Development 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 risk Adequate capitalisation necessary Macro-Economic Policy Greater focus has to put on containing imbalances that could lead to a repeat of the current crisis These 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