East Europe Builds 'Ring of Defense' Against Greek Exit

A "ring of defense" has to be built around eastern European neighbors Romania, Bulgaria and Serbia to help them cope with the fallout from a possible Greek exit from the euro zone, the European Bank for Reconstruction and Development (EBRD)'s chief economist Erik Berglof said on Friday.

The biggest of the three countries, Romania, will be able to withstand the crisis even though Greek banks have quite a significant presence in the country's financial sector, officials from the central bank and commercial banks told CNBC.com on the sidelines of the EBRD's annual meeting in London.

Euro bank notes in a briefcase
Photo: Medioimages | Photodisc | Getty Images
Euro bank notes in a briefcase

There are fears that Greek banks present in the region will not be able to finance their subsidiaries and some analysts have even expressed worries about withdrawals of funds from Greek banks.

"There are already measures in place [to deal with the effects of potential deleveraging by banks]," Berglof said. "We don't speak about it much but… in these times of crisis one has to understand the importance of financial stability."

"We still think there is a lot of willingness in Europe and some hope that there will be a solution in Greece," he added.

When the first leg of the crisis hit Central and Eastern Europe in 2009, Western banks present in the region and the authorities in the respective countries met in the capital of Austria and created the Vienna Initiative – an agreement meant to deal with the effects of the Lehman Brothers collapse on the CEE region.

Under the Vienna Initiative, Western banks pledged to maintain funds in their Eastern subsidiaries despite the need for capital in the parent banks, to prevent a disorderly outflow of funds from the region.

The Vienna Initiative was successful in ensuring that there was no significant flight of capital from Eastern European countries but, because of the debt crisis in the euro zone, the region has still not recovered and a new initiative, called Vienna 2.0, was launched.

Under Vienna 2.0, Western banks pledged to maintain lending levels in the countries that receive aid from the International Monetary Fund in the region, including Romania.

Prudential Measures

"Solvency rate. Prudential measures," Romanian central bank governor Mugur Isarescu told CNBC.com when asked about the measures the country takes to protect against a possible spillover effect from the crisis in Greece.

The solvency ratio in Romania's banking system is above 14 percent and local regulators have said the local subsidiaries of Greek banks are well capitalized.

Romania has not seen significant outflows of foreign portfolio capital and no sign of withdrawal of deposits from banks, deputy central bank governor Cristian Popa said.

"I haven't seen any sign of deposit withdrawals. Our concern is to prevent a possible disorderly deleveraging [of foreign banks' subsidiaries in Romania] from taking place in the future, although parent bank exposure to subsidiaries in Romania has so far remained broadly stable."

"What's important is that the deleveraging doesn't become disorderly, excessive or overly rapid."

"Neither the international financial institutions nor the host countries wish to see a situation in which a credit crunch is created [because of deleveraging]," Popa said.

"Loans from foreign banks to their subsidiaries in Romania have not decreased so far. We are concerned about what could happen from now on," he added.

Popa said the country was working with the International Monetary Fund on continuously improving stress test methodologies for the local banks, with Romania now being one of the most advanced EU member states in terms of banking sector stress testing.

The Romanian central bank deputy governor believes that Greece will be able to overcome its crisis and remain in the single currency.

"I still think it is more probable that Greece will stay in the euro zone, but it is important that it meets all its commitments," Popa said.

Steven van Groningen, the President of Romania's third-largest bank, Raiffeisen Bank Romania, said he was not worried about a direct impact of the Greek crisis, as Greek banks in Romania are well capitalized.

"The only thing that I see is a bit of an overall reaction in the region… currencies under pressure," van Groningen told CNBC.com.

Romania's currency has hit multiple record lows against the euro recently, as investors pulled out of assets perceived as risky.

"We have to see if this continues and we are monitoring the impact on consumers with loans in euro," he added. "We're not excluding it… but I don't expect anything shocking."

Van Groningen added that consumer confidence in Romania was low, affected not only by the crisis in the euro zone and Greece but also by the recent political changes – with two governments collapsing in three months – and the prospect of upcoming elections.

However, he said he was convinced the situation was "manageable" despite the gloom in the markets.

"It's like taking an unpleasant medicine but you know you will live and come out of it stronger," van Groningen said.