Moody's Downgrading Banks with Eastern European Exposure

As we discussed a week ago, things in Eastern Europe are going from bad to worse and are dragging neighboring countries into the hole. Moody's just announced that Austrian, Swedish and other banks with Eastern European subsidiaries may face rating downgrades due to deteriorating economic conditions.

East European banks, which are mainly subsidiaries of financial institutions such as Raiffeisen Zentralbank Oesterreich AG and Swedbank AB, are likely to come under “downward pressure” which may also weaken their parent companies, Moody’s wrote in a report released today in London.

Zero Hedge previously discussed the extensive exposure that banks have in Eastern Europe, which according to estimates could amount to a total of €1.3 trillion. Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84% of Western European bank loans in Eastern Europe (click on chart to enlarge).

According to Bloomberg, “the downturn in eastern Europe will be more severe as a consequence of many countries’ dependence” on capital flows from west Europe banks, Moody’s analysts led by Reynold Leegerstee wrote in the report.

Of European countries, Austria is by far the most threatened:

Austria, whose banking system is “most exposed” to central and eastern Europe, has two of the biggest lenders in the region. RZB made 79 percent of its 2007 pretax profits in eastern Europe, including Russia and Ukraine through its Raiffeisen International Bank Holding AG unit, and Erste Group Bank AG earned 65 percent of its pretax profits in countries including Romania, the Czech Republic and Slovakia.

Erste, which said last week that full-year profit probably slumped about 26 percent, is in talks with the Austrian government to get 2.7 billion euros ($3.4 billion) in state aid. RZB, which owns a 69 percent stake in Raiffeisen International, which is active in 18 eastern European countries, is also in talks with the Austrian state and has asked for 1.75 billion euros.

It has been foolish to assume that the convergence that "Western" and "Eastern" European countries have been undergoing over the past 20 years, could be hidden under the rug to prevent all the ugly side effects of convergence from spilling over (LTCM deja vu anyone? yes, it is a stretch, but oddly ironic nonetheless). This is merely yet another glaring example of what happens when all the good things about globalization, that conventional wisdom takes for granted, go terribly wrong.

Comments

[User 305589:]

well, hysteria runs high and thorough analysis doesn't count any more. the media and also areas like SA look increasingly as if a giant contest for the 'worst headline of the day' was going on 24/7.
Sure, there is a credit mess, sure, some countries, corporations and private households are overextended. But hold on for a moment. The sky is not going to fall. there will be losses from non-performing loans and (likely higher losses than those) from depreciating Eastern European currencies. But the many billions and even trillions that many people are now 'forecasting' are out of whack with reality. they are wild, hysterical guesses. Since I am on the ground in Eastern Europe I can say that with 100% confidence. These absurd loss guesstimates are not based on any on-the-ground analysis. Which, btw. applies to the ratings agencies as well which are now in their own race for the fastest and for the most downgrades in any given period.
Ukraine is the most endangered eastern country but it will not go under. If Europe and/or IMF and USA do not backstop the country, Russia will do it, thereby virtually securing the Ukraine for itself long-term.
The baltic states face problems, but the Swedish banks and sweden can and will handle those. The possibility of a wipeout of Western banks in Eastern Europe are there - but the likelihood is far smaller than what most people fear - and way way smaller than what the gloom-screamers want to make the public believe.
Sadly, many people and many so-called 'journalists' seem to really enjoy publishing the worst possible headlines or speculations these days. Few seem to keep in mind that they have a responsibility also that comes with their acces to a wide audience - a responsibility not to unecessarily shaken an already fragile public mood just for the sake of getting another sensational article published.

Feb 17 08:17 AM

[user 305590:]

dear user 305589,
you have not quoted one statistic, one source or even a basic economic philosophy as to why you are right, and everyone else is wrong. i too am on the ground in eastern europe (romania, for that matter) and everywhere i look i see sign of struggle and economic woe. i believe in self-fulfilling prophecy, but the fact is, there are some big problems in the global finance world, and your ignorance won't make them go away. good luck.

Feb 17 09:26 AM

[Mad Hedge F...:]

Eastern Europe has the world’s worst performing stock markets so far this year. After a year when investors thought things couldn’t get worse, they did, with shares in Poland, the Czech Republic, and Hungary down 15%. Soaring current account deficits have knocked their currencies down another 12%. Companies from the old East Bloc are more leveraged than most, and those that borrowed in dollars or Swiss Francs are in especially bad shape.

Feb 18 12:07 PM