EU Bank Recapitalization Rules Raise Bulgaria's Drain Ghost

Finance | October 27, 2011, Thursday // 15:59|  views

EFG Eurobank, Greece's second-largest lender, is owner of Bulgaria's Post Bank. Greek banks control about 30% of banks' total assets in Bulgaria and about a sixth in Romania and Serbia. Photo by BGNES

The new rules on bank recapitalization, adopted at the EU summit on Wednesday, have triggered fears of a bank drain in the subsidiaries in Eastern Europe, including Bulgaria.

Under the "three-pronged" deal to fix the eurozone's debt crisis, which was clinched after marathon talks in Brussels, European banks will be required to raise about 106bn euros in new capital by June 2012.

It is hoped that this would help shield them against losses resulting from any government defaults and protect larger economies - like Italy and Spain - from the market turmoil.

With the majority of their assets in the hands of eurozone member states, however, eastern European countries are wary that the bank recapitalization will give the green light to draining egional subsidiaries of money, putting their economies at risk.

"This will definitely have an impact," Christian Keller, an emerging-markets economist at Barclays Capital in London, told Bloomberg agency in a telephone interview.

"If you have a banking system that is intrinsically linked to western European banks and western European banks deleverage, you realize that growth in that region will no longer be as it was before."

Western banks will examine "every part of their balance sheet" and may be more willing to sell subsidiaries than before and more reluctant to roll over financing when it matures, Keller said.

"We agree with the Romanian president's message that any recapitalization has to benefit the group as a whole," Jeromin Zettelmeyer, deputy chief economist with the European Bank for Reconstruction and Development (EBRD) told EUobserver.

In the event of debt restructuring, Greek banks "will require a significant recapitalization", with the London-based EBRD seeing two scenarios:

One where everything goes well and subsidiaries can go on without "being cut off from parent banks" and one when restructuring "is not handled perfectly" and national governments in Bulgaria, Romania and Serbia will have to intervene to prop the subsidiaries.

Zettlemeyer said governments in eastern Europe have "contingency plans" ready and that the International Monetary Fund would back such an action with financial support.

That, however, would increase the countries' foreign debt and widen the budget deficit governments are currently struggling to keep under control, EUobserver commented.

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Tags: European, europe, Eastern, Eurozone, French, Austrian, Greek, banks, banking sector, recapitalisation, Bulgaria, Romania, greece, euro zone, recapitalization


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