Banks ask for crisis funds for Eastern Europe

"Leading international banks operating in central and eastern Europe have clubbed together to lobby the European Union and the European Central Bank to extend their anti-crisis policies to ease the credit crunch in the region.

The group of nine, which wants action to ease liquidity shortages and help revive lending, is urging Brussels and the ECB to extend support beyond the EU’s new member states, such as Poland, to prospective members, such as Serbia, and to Ukraine, which has few prospects of joining the bloc soon."

By Stefan Wagstyl in Vienna
Published: January 21 2009 23:36 Last updated: January 21 2009 23:36

This initiative is very interesting, although I am not quite sure what its purpose will be. The major risk for the Eastern European companies is not really, not to be able to get more credit, but to get bancrupt because they cannot repay their debts.

I guess that we will see a lot of provisioning activities during the next few months, as the banks will start to redefine the value of their credit portfolio in Eastern Europe. I remember going through the previous real eastate crisis as account manager in the restructuring department of a large Swiss bank. The crisis was local at the time, but still very difficult to manage.

The major difficulty was for the account manager to recognise that the situation had changed and make the necessary decisions. It is not easy for them to acknoledge that their customers will never be in a position to repay and that the guarantee provided (in most cases a real estate guarantee) has lost most of its value. I remember the case of this butcher who went to the bank to get a credit for a new butchery and left with a huge credit to build 3 flats on top of his new butchery. When the crisis came, a few months after completion of the construction, the flats stayed empty and the butcher went bankrupt. Nobody seemed to remember that this highly successful man was fouled by his financial advisor.

An additional problem in Eastern Europe is that most of the relatively young banking managers have never lived through a crisis and will not be able to act correctly. I would advice the banks to outsource the analysis of their portfolio to a competent partner. It is vital for the survival of the Eastern European creditors that their financial situation is analysed professionally and the necessary measures implemented quickly. "To give time to time" is the wrong strategy. The situation will not get better, it will get a lot worse.

For the banks, it is better to have a performing loan in their books, a loan that has been adapted to the market conditions (by accepting a large write-off if necessary), than to kill their future customers. Indeed the crisis will end and the customers will then stay with their financial partner if they have been treated fairly. It is better to accept that one shares part of the responsibility for the current situation that just to follow the rules and bankrupt the whole country.

To finish on a positive note, I would argue again, that the situation, at least in Bulgaria, is not as dire as it could be, because of the large untapped pool of savings that most companies can realise if they act quickly. The difficulty is not only in recognising this untapped pool, but mostly in realising it.