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EU bank weight loss scheme threatens famine abroad

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Western European banks’ efforts to trim balance sheets are putting the squeeze on corporate fundraising from Albania to Australia, threatening the health of economies near and far.

Forced to raise capital by regulators who want to head off another financial crisis akin to 2008, many banks are looking to dump assets and focus on top clients, moves that could make it harder for others to refinance.

Spanish bank Santander became the latest example on Tuesday, saying it would sell a $1 billion stake in its Chilean unit to raise cash.

“This was a problem in 2008 as well, in markets like Hungary, Romania and Russia in particular. There’s a fundamental inconsistency with what policymakers are trying to do in Europe,” said Philip Poole, global head of investment strategy at HSBC Global Asset Management.

“On the one hand, they tell banks that they should continue to lend, expand their balance sheet. On the other hand, they are imposing quite draconian increases in capital requirements in a very short period of time … So banks are going to find it difficult to raise capital in this environment.”

The head of UniCredit in central and eastern Europe (CEE), Gianni Franco Papa, said on Tuesday he was cautiously optimistic about prospects for the region, where economic growth is set to outpace that in western Europe.


But he added it was clear that lending growth rates in the region would not rebound to match the robust pace seen in 2007 before the financial crisis.

And the problem could be exacerbated if regulators follow Austria’s example and impose new rules that aim to curb lending growth by linking to the amount of refinancing that CEE banking subsidiaries arrange via local deposits or debt issues.

“It is something that has to be handled with care. We cannot change the situation overnight,” Papa told reporters. “What could happen is that you put a squeeze on liquidity, you have a credit crunch.”

This, in turn, could backfire on banks by boosting non-performing loan rates, prompting them to retrench.

The Economist Intelligence Unit said the steps by Austria, whose banks are the largest lenders in CEE, to limit lending to units in that region showed how the euro zone crisis is spreading well beyond its borders.

“Only several weeks ago many observers were arguing that CEE is much better placed than the euro zone periphery (which is not saying much) and might be relatively resilient in the face of euro zone difficulties. This was wrong then and is even more obviously wrong now,” it said.

It argued that the region is highly exposed to the euro zone crisis in view of multiple links, including trade, remittances, foreign investment flows and the banking sectors.

It said Hungary, Albania, Croatia and Serbia were the countries most vulnerable.

David Creighton, chief executive of Montreal-based Cordiant Capital, a key player in the emerging market corporate loan fund sector, said fundamentally strong corporate borrowers in CEE were struggling to secure finance from traditional debt providers as a result of deleveraging of Western lenders.

“The universe of high-quality loans that we could look at is increasing, and competition for those loans is decreasing. Banks are showing weaker appetite to lend to projects right across the board. I can’t say that we have seen any one country suffering the most difficulties,” he said.

But he was wary of calling events a credit crunch.

“A crunch to me suggests some sort of a quick specific event, but what we’ve seen is a slow train wreck where there’s just a lot of little crunching going on,” he said.

“The volume of capital coming out of the traditional banks is much smaller, and what is coming out does not really fit with borrower needs, particularly infrastructure projects, which require 10-, 15-year money. Where there is lending going on, it tends to be much shorter than that.”

Coupled with the 17-member euro zone sovereign debt crisis, the banking ructions are casting long shadows.


On the other side of the globe, European lenders are retreating from the $65 billion Australian syndicated loan market to free up funds as the debt crisis makes funding scarce and sends costs soaring.

CBA, the nation’s top mortgage lender, was ready to make its debut with a euro-denominated five-year issue last week, but soaring borrowing costs in Europe forced it to defer the offer, a banker familiar with the situation said.

Elod Dinnyes, secretary of the Gyor-Moson-Sopron country trade and industry chamber in northwestern Hungary, said builders were already feeling the pinch.

“For the time being, construction sector businesses are crying on our shoulders. The situation is very bad in that sector and that’s where the banks’ credit squeeze is first felt,” he said.

In Latin America, local bankers are cautiously watching a partial pullout of European lenders from domestic loan markets. About 68 percent of total cross-border loans in the region come from western European and British banks, according to Bank for International Settlements data.

“We might see disruptions if they trim their exposure massively,” said a Sao Paulo-based banker who declined to be identified. “It won’t be the end of the world, but I don’t think locals or state banks would be willing to take up the slack … aggressively.”

Banks in Brazil, Mexico and Chile may be slow to replace lending from Europe’s banks now that Latin American economies are slowing. In Brazil, an increase in lending by state development bank BNDES could be limited by a government push to curb public spending.

Spanish banks represent about a third of cross-border loans, and any move by those banks to cut their exposure could hamper infrastructure, mergers and acquisitions as well as capital spending in Brazil, Colombia and Chile.

So far, some banks are resisting cutting their exposure outright. Banco Santander said it would sell a 7.8 percent stake in subsidiary Santander Chile to raise cash, buying it some time.

Yet the region’s short-term corporate lending market is likely to feel some pain.

“I could see a pullout in the cheapest credit market represented by intercompany loans, but the regional slowdown should also put a lid on demand,” said Flavia Cattan-Naslausky, a strategist with Royal Bank of Scotland. “One thing cancels the other out.”




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