1) European banks have significantly reduced funding to Eastern Europe since the 2008 global financial crisis and a fresh wave of deleveraging occurred in the second half of 2011 as the eurocrisis escalated. 2) Countries like Hungary, Cyprus and Slovenia saw relatively large declines in external bank funding, while others like Poland and the Czech Republic also experienced decreases. 3) Despite some reduction, external bank funding from European banks remains very important for emerging European countries, with dependence on this funding being highest in countries like Cyprus, Croatia, and the Czech Republic.

1. Macro Focus
Group Economics
Emerging Markets
Arjen van Dijkhuizen
European banks reduce funding to Eastern Europe Tel: +31 20 628 8052
13 July 2012
• Strong bank funding links between emerging Europe and (South) Western Europe. Strong linkages
connect emerging Europe’s economic fortunes with that of (South) Western Europe, as was shown during the
global crisis in 2008/09. Although the region has recovered from this crisis, it remains dependent on (South)
Western Europe and vulnerable to contagion from the eurocrisis. In this report we zoom in at this vulnerability
from an external bank funding perspective, although trade and investment are other key contagion channels.
• Fresh wave of deleveraging by (South) Western European banks. Regional external imbalances have
declined since the global financial crisis, reducing dependence on external finance. Total European bank
exposure to the region fell by USD 365 bn (-23%) between mid-2008 and mid-2010, followed by a recovery of
USD 249 bn between mid-2011 and mid-2011. A fresh deleveraging wave (USD 188 bn or -13%) took place in
the second half of 2011, when the eurocrisis escalated and global risk aversion surged.
• No complete funding stop. Emerging Europe has not faced a complete funding stop during the escalation of
the eurocrisis so far – as some had feared. Some countries like Hungary, Cyprus and Slovenia are faced with a
relatively large decline of external funding; this also reflects country-specific risks. The ECB’s LTROs, in
particular, and the second Vienna Initiative have contributed to preventing a sudden funding stop. But these
initiatives will not be sufficient to prevent a longer term deleveraging trend.
• External (parent) bank funding remains key. External (parent) bank funding continues to play an important
role in emerging Europe, given the high degree of foreign bank ownership and high loan-to-deposit rates in
many countries. Compared to economic size, dependence on European bank funding is very high in Cyprus and
Croatia, followed by the Czech Republic. Austrian and Italian banks have the highest exposures. Greek banks
are heavily involved in Cyprus, but also important in Bulgaria, Serbia and Romania.
• High dependence on European bank funding leaves the region extra vulnerable to eurocrisis. The impact
of deleveraging by European banks on emerging European economies through the credit channel may of
course be compensated by local or other foreign banks stepping in, although on balance bank assets to GDP
ratios have generally declined over the past years. Moreover, other forms of external financing (like FDI or
portfolio inflows) play a role as well in shaping regional funding conditions. In any case, the still high
dependence on European bank funding (besides other trade and financial linkages) leaves the region
vulnerable to a further escalation of the eurocrisis, such as a financing crisis in Spain and/or Italy, a disorderly
Greek exit from the eurozone or an even broader break-up of the currency union. Longer-term, the region’s
stability of the region would in fact profit from a reduced dependence on external (European) bank funding and a
further decline of loan-to-deposit ratios.

2. 2 Macro Focus - European banks reduce funding to Eastern Europe - 13 July
Introduction emerging European countries have declined since the global
Strong trade and financial linkages connect emerging Europe’s crisis, meaning that their dependence on external finance is
economic fortunes with that of (South) Western Europe. This now lower than before the global financial crisis.
was clearly shown during the crisis of 2008/09, when a global
recession caused regional exports – mainly destined for the … but still high in some countries
eurozone – to collapse. Simultaneously, a surge in global risk Despite the general reduction of imbalances, the external
aversion led to the drying up of capital inflows from the West. position of several countries is still fragile. Serbia, Turkey,
These events caused severe fiscal, banking and balance of Belarus and Romania have large current account deficits
payment pressures across the region. Complementary to ranging between 6% and 10% of GDP. External debt is
IMF/EU rescue programmes, through the so-called Vienna particularly high (> 100% GDP) in Hungary, Latvia, Estonia,
Initiative foreign banks active in the region agreed to roll-over Slovenia and Croatia. By contrast, the external position of the
exposures and inject capital were needed to prevent a region’s largest economy, Russia, is strong. Russia’s current
systemic crisis in the region. Although emerging Europe has account shows structural surpluses, external debt is low and
recovered from the 2008/09 global crisis, the region remains FX reserves are very high. Its strong external position is an
dependent on (South) Western Europe and vulnerable to important pillar of Russia’s investment grade ratings.
contagion from the eurocrisis. In this report, we will zoom in at
this vulnerability from an external bank funding perspective. External indicators
% GDP
External imbalances generally reduced …
Before the global financial crisis in 2008/09, emerging 5 RUS
Current account balance
Europe’s growth model was based on external capital inflows EST HUN
feeding a domestic credit boom. This model went hand-in- BUL SLO
0
hand with the built-up of various imbalances such as high SLR LIT
CZE CRO LAT
current account deficits. Particularly in countries with fixed
POL UKR
exchange rates (Bulgaria, Baltics) but also in Romania and -5
ROM
Serbia, current account deficits surged to 15-25% of GDP in BEL
2007. After the collapse of Lehman Brothers in the autumn of TUR
-10 SER
2008, a surge in global risk aversion caused capital flows to
emerging Europe to dry up, marking the end of the region’s 0 25 50 75 100 125 150
growth model. External debt
Source: ABN AMRO Group Economics, EIU
External correction between 2007 and 2012
Change in current account balance, % points GDP Importance of external (parent) bank funding
25 As a source of external funding, (parent) bank funding is
traditionally important for emerging Europe. In particular
20
Austrian and Italian banks are very active in Central Europe
15 and the Balkans, while Swedish banks dominate the Baltic
10 banking landscape. In many countries, foreign bank ownership
corresponds to 60% of bank assets or more. In the Czech
5
Republic, for instance, almost 80% of bank assets belongs to
0 foreign-owned banks (predominantly of Austrian and Belgian
origin). In Poland and Hungary, this share is 60%. Croatia has
-5
the largest share of foreign-ownership (90%), mainly of Italian
N
R
E
L
P
M
R
R
R
S
O
L
T
L
O
T
T
L
BU
CZ
or Austrian origin.
ES
SE
CY
BE
PO
A
LA
TU
LI
SL
U
K
RU
CR
SL
RO
H
U
M
Source: ABN AMRO Group Economics, EIU
A second factor explaining the importance of external bank
funding stems from the high loan-to-deposit ratios in many
The crisis has triggered a strong external adjustment in a large countries. These are particularly high for Ukraine (155% in
majority of countries, visible for instance in the significant 2011) and Hungary (143%), but also for Serbia, Romania and
improvement of current account balances since 2007. This is Croatia (around 120%). Looking at another vulnerability
particularly true for Bulgaria and the Baltics, where the current indicator, foreign liabilities to total funds, Hungary, Serbia,
account balance improved by 15-20% points of GDP since Romania and Croatia again score high together with Bulgaria.
2007. But also Hungary, Serbia, Romania and Croatia show a The Czech Republic ranks well on both indicators, confirming
current account correction of more than 5% points of GDP that the Czech banking sector is one of the region’s healthiest.
since 2007. To conclude, external imbalances of most

3. 3 Macro Focus - European banks reduce funding to Eastern Europe - 13 July
Emerging European banks: some indicators European banking exposure to Emerging Europe
% USD bn.
160 1600
120 1200
800
80
400
40
0
0 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11
UKR HUN SER ROM CRO POL RUS TUR BUL SLR CZE
GIIPS Austria France Germany
Loan to deposit ratio Foreign liabilities to total funds Netherlands UK Other
Source: Global Insight Source: BIS, ABN AMRO Group Economics
Foreign ownership of banks in Russia and Turkey is far below Peripheral banking exposure to Emerging Europe
the regional average, so we will treat them as a different
USD bn.
category as the issue of external bank deleveraging is less
important for them. We will also set Ukraine apart, as the 400
exposure of Russian banks (which are quite active in Ukraine)
is not included in the BIS data which we will use. 300
200
Banks’ funding patterns since the global financial crisis
Given the importance of (parent) bank funding for emerging
100
Europe, a multilateral initiative was launched in 2009 to
prevent a systemic crisis in the region. In the so-called Vienna
0
Initiative, foreign banks active in the region (mainly Austrian)
agreed to roll-over exposures and inject capital where needed, Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11
while multilateral institutions (IMF, World Bank, EBRD) Italy Greece Spain Portugal Ireland
committed to new lending arrangements. We will look at Source: BIS, ABN AMRO Group Economics
European bank funding to emerging Europe using BIS data.
Although these data lag by around half a year (latest available
Rebalancing between mid-2008 and mid-2011
data refer to end-2011), we will use them to have a closer look
The Vienna Initiative has contributed to restoring regional
at funding patterns and possible risks stemming from these.1
financial stability, as it has prevented a ‘rush to the exit’ by
Western banks from emerging Europe. Such an exit would
Large share regional bank funding from Austria and Italy
have significantly disrupted the credit mechanism in emerging
Almost half of European bank funding to emerging Europe
European countries, which would have damaged these
comes from Austria (average share 21% in the period 2005-
economies – already in distress during the global crisis – even
2011) and the five eurozone ‘peripheral’ countries Greece,
more. But despite the initiative, European bank funding to
Ireland, Italy, Portugal and Spain (average share 23%). In late
emerging Europe – which covers more than 95% of global
2011, the respective shares of Austria and the periphery were
bank exposure – has declined in the immediate aftermath of
20% and 28%. Within the periphery, Italy clearly stands out
the global financial crisis. Between mid-2008 and mid-2010,
with a share in total European bank funding of 16% in late
total European bank exposure to emerging Europe declined by
2011. French banks had a share of 11.5% in late 2011,
USD 365 bn (23%). It was not before mid-2010 that European
followed by German banks (10.5%), Greek banks (7%), Dutch
banking exposure to the region started rising again. But this
banks (6.5%), UK banks (5%) and Spanish banks (3%).
correction did not last long, until mid-2011. Between mid-2010
and mid-2011 European bank funding to emerging Europe
rose by USD 249 bn. On balance, between mid-2008 and mid-
1
The BIS data used here capture all foreign claims of the reporting banking 2011, total European bank funding to emerging Europe was
systems on an ultimate risk basis. According to the BIS website, these data reduced by USD 116 bn (-7%). But we see strong differences
cover all contractual lending by the head office and all its branches and
subsidiaries on a worldwide consolidated basis (so net of inter-office among the countries concerned. German banks have reduced
accounts). We have taken the ‘ultimate-risk basis’ data, reflecting that their emerging European exposure by USD 86 bn in this
banks’ country risk exposures can differ from that of contractual lending due
to the use of risk mitigants such as collateral. period, followed by Irish and Dutch banks (next chart, green

4. 4 Macro Focus - European banks reduce funding to Eastern Europe - 13 July
bars). According to the BIS data, Spanish banks (+ USD 42 eurocrisis in terms of banking sector and fiscal issues. Poland
bn) and Greek banks (together with UK banks) have in fact and the Czech Republic were also faced by a relative strong
increased their emerging European exposure in this episode. decline of European bank funding in the second half of 2011.
Change in banking exposure to Emerging Europe Change in external bank funding from Western Europe
USD bn. %
50 30
25 20
10
0
0
-25 -10
-50 -20
-30
-75
-40
-100
R
N
S
R
R
L
ZE
K
M
T
O
L
YP
T
V
T
K
U
U
U
TU
ES
SE
PO
SL
LA
R
LI
O
SL
U
R
H
B
C
C
DE IE NL IT AT PT FR UK GR GIIPS ES
C
R
June 2011 vs June 2008 Dec 2011 vs June 2011 June 2011 vs June 2008 December 2011 vs June 2011
Source: BIS, ABN AMRO Group Economics Source: BIS, ABN AMRO Group Economics
Fresh wave of deleveraging since mid-2011 … But Western European bank funding still very important
The yellow bars in the previous chart show the changes in Despite the deleveraging trend, bank funding from (South)
exposures between June 2011 and December 2011. This Western European banks continues to be very relevant for
episode covers the further escalation of the eurocrisis. This emerging European economies. We can show this by looking
was marked by a further deleveraging by Western banks vis-à- at the size of external bank funding in relation to the size of the
vis emerging Europe. Total European bank exposures to the economy. The next chart shows per recipient country the ratio
region were reduced across the board in this period, by a total of total funding by European banks to GDP, thereby explicitly
of USD 188 bn, or 13% of the outstanding exposure. In distinguishing between Austrian, Italian, French, German,
absolute terms, Austrian banks reduced their exposures to the Greek and other European bank exposure. European bank
region the most in this period, followed by German, French funding corresponds to 50% or more of GDP in most countries,
and Italian banks. In relative terms, Irish banks reduced their with the exception of Poland (and Turkey, Ukraine and Russia
exposures to the region the most, followed by Portuguese, as mentioned before). For the Czech Republic (and Estonia),
German, Austrian and Spanish banks. The underlying data this share is around 80% of GDP. In the Czech Republic,
show that the heavily exposed Austrian banks were alreading Austrian banks are very active. Hungary (where Austrian and
reducing their exposure to emerging Europe before the Italian banks are quite active) ranks in the middle of the pack.
Austrian supervisors tightened lending rules in November
2011. Moreover, they lend support to the assumption that Dependence on European bank funding
banks from the eurozone periphery got particularly strained –
% GDP
at least since mid-2011 – and therefore have a relatively high
140
tendency to delever externally compared to the average.
120
… also from a recipient country’s perspective 100
From a recipient country’s perspective, between June 2008 80
and June 2011 almost all countries (except Turkey, Poland 60
and the Czech Republic) witnessed a decline in external bank 40
funding from Western Europe (next chart, green bars). To the 20
countries faced with the highest degree of external 0
deleveraging belong crisis-struck Cyprus and Hungary and the
N
R
S
R
R
L
ZE
O
K
M
T
L
YP
T
V
T
U
U
K
U
TU
ES
SE
PO
SL
LA
R
LI
SL
O
C
H
B
U
R
C
C
R
Baltics which experienced an extreme external correction. In
Austrian banks Italian banks French banks
the more recent period (yellow bars), all emerging European German banks Greek banks Other European banks
countries face a decline in European bank funding. Hungary is Source: BIS, ABN AMRO Group Economics
hit the most in the second half of 2011, reflecting a range of
political and economic risks resulting in the loss of the Cyprus – a regional banking sector with high external (bank)
country’s investment grade rating. Hungary is followed by debt – is by far the most dependent on Western bank funding
Slovenia, which also was struck with contagion from the in GDP terms. Total European bank funding to Cyprus

5. 5 Macro Focus - European banks reduce funding to Eastern Europe - 13 July
corresponded to 135% of GDP in late 2011, with the largest balance sheet problems forcing them to reduce foreign
shares of external funding (around one third) coming from exposures. Finally, across Europe, banks will be faced by
Greece. Vice versa, Cypriot banks also have large exposures political pressure to create room in their balance sheets to
to Greece. The strong interconnectedness between Cyprus increase credit growth at home markets, which may come to
and Greece was the main reason why Cyprus had to request the detriment of foreign funding.
an EU/IMF bailout in June. Croatia – which also has a fragile
external position as discussed above – comes in second with Conclusions
total European bank funding equivalent to 110% of GDP. The Emerging Europe’s external imbalances have declined since
chart also shows that Greek bank funding is particularly the 2008/09 crisis, reducing the region’s dependence on
relevant for Bulgaria, Serbia and Romania (next to Cyprus) external finance. This mirrors the development of European
and confirms that the Baltics are very dependent on ‘other banks’ funding patterns to the region. Total European bank
European bank funding’ i.e. funding from Swedish banks. exposure to emerging Europe fell by USD 365 bn (-23%)
between mid-2008 and mid-2010, which was followed by a
Will LTROs and Vienna 2.0 save the day? recovery of USD 249 bn between mid 2011 and mid 2011. A
As the BIS data used refer to end-2011, the question rises fresh wave of deleveraging (USD 188 bn or -13%) took place
what has happened since. Will the picture change if we take in the second half of 2011, when the eurocrisis escalated and
into account 1) the introduction of special liquidity operations global risk aversion surged.
with a three-year maturity (LTROs) by the ECB in December
2011 and February 2012 for a cumulative EUR 1 trillion and 2) Emerging Europe has not faced a complete funding stop
a second Vienna Initiative launched last January? during the escalation of the eurocrisis so far – as some had
feared. Some countries like Hungary, Cyprus and Slovenia are
In our opinion, the LTROs in particular have been important in faced with a relatively large decline of external funding; this
preventing a sudden halt of capital flows towards emerging also reflects country-specific risks. The ECB’s LTROs, in
Europe as they have provided breathing space to banks particular, and the second Vienna Initiative have contributed to
across Europe and have helped to improve the conditions on preventing a sudden funding stop. But these initiatives will not
the European interbank markets. The LTROs have also be sufficient to prevent a longer term deleveraging trend
created room for peripheral banks to increase purchases of
domestic government bond holdings, thereby alleviate funding External bank funding still plays a key role in emerging
pressures for peripheral sovereigns. Without these Europe, given the high degree of foreign ownership in regional
instruments, banking distress across Europe would probably banking sectors and the still high loan-to-deposit rate in many
have been more extreme and external deleveraging towards countries. Austrian and Italian banks still have the highest
emerging Europe probably more significant. With regard to the exposures in the region. Compared to economic size, the role
second Vienna Initiative, this will have contributed to of European bank funding is still very high in Cyprus and
preventing such a ‘sudden stop’, although we doubt whether Croatia, but also in the Czech Republic (whose banking sector
the sequel has been as successful as the original. continues to be one of the region’s healthiest) and the Baltics.
Greek banks were heavily involved in Cyprus in late 2011, but
While both initiatives have been useful in preventing sudden also quite important in Bulgaria, Serbia and Romania.
funding stops so far, they will probably not be sufficient to
prevent a longer-term deleveraging trend towards emerging The impact of deleveraging by European banks on emerging
Europe (and other emerging regions). This trend is a function European economies through the credit channel may of course
of demand and supply factors. With regional growth staying be compensated by local or other foreign banks stepping in,
below pre-crisis levels, loan demand has slowed. Moreover, as although on balance bank assets to GDP ratios have generally
discussed above, external imbalances have generally declined declined over the past years. Moreover, other forms of external
since the global crisis, meaning that there is less need for financing (like FDI or portfolio inflows) play a role in shaping
external financing. On the supply side, Western European regional funding conditions as well. In any case, the still high
banks are faced with the tightening of (inter)national dependence on European bank funding (besides other trade
supervision standards forcing them to delever externally. and financial linkages) leaves the region vulnerable to a further
Faced with a legacy of high exposures in emerging Europe, escalation of the eurocrisis, such as a financing crisis in Spain
Austrian banks, for instance, were ordered by their supervisors and/or Italy, a disorderly Greek exit from the eurozone or an
in November 2011 to limit regional lending growth to what they even broader break-up of the currency union. Longer-term, the
could raise locally. The further tightening of bank capital region’s stability of the region would in fact profit from a
standards by EBA has also impacted on the need for banks to reduced dependence on external (European) bank funding and
delever.2 Peripheral banks, in particular, are faced with a further decline of loan-to-deposit ratios.
2
In October 2011, EBA required banks to mark-to-market sovereign bond an estimated additional EUR 115 bn capital need for European banks
holdings and raise capital ratios to 9% in June 2012. These revisions lead to (World Bank, Global Economic Prospects, June 2012).

6. 6 Macro Focus - European banks reduce funding to Eastern Europe - 13 July
Stay tuned in to our view on the economy and sectors and download the Markets Insights app via abnamro.nl/marketinsights or
directly in the App Store.
Find out more about Group Economics at: abnamro.nl/economischbureau
This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to
you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and
does not constitute an offer of securities to the public, nor a solicitation to make such an offer.
No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or
warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information
contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any
given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof.
Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter
under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and
check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future
returns. ABN AMRO reserves the right to make amendments to this material.
© Copyright 2012 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").