Special Report: Global Financial Crisis
BRUSSELS, Feb. 18 (Xinhua) -- European banks, already
hard hit by the global financial crisis, are facing new risks as worries over
Eastern Europe mount.
Credit rating agency Moody's Investors Service issued
a warning earlier this week that the banking system in Eastern Europe is
increasingly vulnerable to the economic crisis.
"The relative vulnerabilities in Eastern European
banking systems will be exposed by an increasingly tougher operating environment
in the region as a result of a steep and long economic downturn coupled with
macroeconomic vulnerabilities," Moody's said.
The ratings agency said it expected "continuous
downward pressure on Eastern European bank ratings" because of deteriorating
asset quality, falling local currencies, exposure to a regional slump in real
estate and the units' reliance on short-term funding amid the credit crunch. It
warned of "hard landings" for most countries in the region.
The more worrying part is Moody's prediction that
Western European banks are also at risk of rating downgrades because of loans to
Eastern Europe.
Eurozone banks have the largest exposure to Central
and Eastern Europe, with liabilities of 1,500 billion U.S. dollars -- about
90percent of total foreign bank exposure to the region.
When Eastern Europe enjoyed robust growth in recent
years, Western European banks rushed there to share in the fruits.
They not only took large stakes in local peers, but
also lent heavily to local households and companies, which prefer cheaper
foreign currency borrowing due to high domestic interest rates.
But everything changed after the financial crisis
broke out last year.
The crisis marked an end to the good times for
Eastern Europe and plunged once-vibrant economies into sluggish growth. The
situation got even worse because Western European banks and foreign investors
withdrew money from the region.
Amid fears of capital flight, Eastern European
currencies have suffered extreme volatility and have fallen sharply in recent
days, leading to concern of a looming currency crisis.
So far, Hungary and Latvia have already sought
massive bailouts from the International Monetary Fund (IMF). The IMF has been
warned that Bulgaria, Romania, Lithuania and Estonia may soon follow suit.
On Wednesday, Latvia's Finance Ministry forecast its
economy will contract 12 percent this year, after growth of more than 10 percent
in the three years from 2005 to 2007.
Analysts warn that Eastern Europe could become the
subprime of Europe and one of the biggest threats to financial stability in the
eurozone.
Fears of banking turmoil in the region sent stocks
and currencies sinking across the continent on Tuesday, leaving shares of
Western European banks in heavy loss.
Italy's UniCredit, which has about 25 percent of its
loans in Eastern Europe, fell 7.3 percent. The Belgian bank KBC, one of the
largest brokers in Eastern Europe, fell 12.9 percent.
France's Societe Generale dropped 9.5 percent,
contributing to a 2.94-percent loss to the French CAC 40 index. London's FT100
Index finished down by 2.43 percent.
The euro dropped to a two-month low against the U.S.
dollar and the currencies of Eastern European countries declined further.
The Polish zloty plunged to a five-year low against
the euro on Tuesday, while the Czech koruna hit a three-year trough against the
single currency and the Hungarian forint also fell to a recordl ow.
EU Economic and Financial Affairs Commissioner
Joaquin Almunia acknowledged on Wednesday that the currency turbulence in
Eastern Europe is worrisome.
"I am ... concerned by the evolution of the
volatility in exchange rates of some EU members that have floating regimes," he
said.
Faced with the worsening situation, Hungarian Prime
Minister Ferenc Gyurcsany urged the EU to provide 100 billion euros (126 billion
U.S. dollars) to help Central and Eastern European members save banks.
He said the issue should be discussed at an EU
emergency summit on March 1.
