Moody's To Downgrade 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.

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

[Anonymous]

Hi Tyler,

I work in Slovakia and I can tell you a small story
about the situtation. Prices in CEE are in no comparisson
to income. It is wild west financing.
Many companies cannot compete with Austrian or German
companies when it comes to production cost in the mechanical
engineering field. Where I work they have huge factories
from the communist arms production. Machines have an avarage
age of approx. 30 years, no CNC etc. They do have low
hourly rates, but with TCO will be more expensive.
So mass production goes to China, India; mechanical
engineering is completely being pulled out of CEE.

50% of all CEE banks where owned by Austrian companies.
Since you are mentioning RZB in your articles,
do you think that failing of them could spill over;
so many much larger Banks have failed till now?
I used to work for a CEE investment company called epicinvest, and did get some insight into the things that where going on there.