Europe’s Baneful Banking Structures
The feature chapters in the IMF’s semi-annual Global Financial Stability Report focus on the mixed record of post-crisis emerging Eurozone interventions to revive small business credit in particular and of retail deposit funding reliance following parent and regulatory pushes. Weak supply and demand are due to a combination of collateral, borrower data and debt constraints, and Central and East European economies under fiscal and monetary policy limits have often turned to outside support from the EIB and EBRD. Despite the continued retrenchment in regional cross-border lending, developing market banks are better positioned than advanced peers in terms of capitalization, LTD ratio, asset encumbrance since most senior obligations are unsecured, and subsidiary-head office relations since liquidity and profit transfers can be bilateral. They can more easily meet Basel III criteria without disputes over bail-in provisions and depositor preference in the process of clarification through EU and Financial Stability Board resolution regimes guiding G-20 approaches. Many note lower government securities availability to attain ready cash requirements despite high balance sheet concentrations, and in Latin America countries like Mexico use repos and other wholesale sources more than Asian counterparts. At group level divisions between home and host supervisor mandates remain uncertain, and unsecured debt costs could rise with workout procedure changes, but ample equity endowments should “mitigate adverse impact” in the Fund’s view. Hungary and Poland still have 100 percent loan-deposit ratios as stock market losses were almost eliminated at the Q3 close. Budapest is gearing up for elections as the 2014 budget forecasts 2 percent GDP growth and a budget deficit just under the 3 percent Brussels benchmark. The manufacturing PMI is near 55 as the central bank should sustain rate cutting to 3 percent on below-target inflation. The Orban administration has also injected stimulus through a corporate on-lending scheme as it stays at odds with bank representatives over another foreign currency mortgage conversion package to reduce the 6.5 percent of GDP burden. The forint portion could reach half under the existing exchange rate cap program as authorities try to end the mismatch altogether despite planning an estimated EUR 5 billion sovereign Eurobond pre-financing for next year.
In Warsaw in contrast floating rate home credit at 25-year maturity continues to increase 5 percent as the central bank keeps rates at the bottom indefinitely to spur domestic consumption and investment. However the economic reformers who pioneered the private pension institutional buyer base for capital markets accuse Prime Minister Tusk of Hungary-style confiscation with his recent state social security takeover proposal to keep within constitutional debt limits and reverse sagging favorability results. After cancellation of government bonds, debt/GDP will drop below 50 percent, but that level of popular approval remains remote with the opposition clearly ahead in opinion surveys. Foreign holders will be the main accounts at over one-third the total buttressed by a $35 billion IMF contingency facility to seal structural cracks.
