- The potential crisis in Eastern Europe is really just the entrée. Although, it is bad, it is not as bad as a sovereign debt default by UK or US. Reuters reports:
Capital flows to emerging Europe could come to a sudden halt if the foreign banks that dominate the region get into refinancing problems, according to a study published by the Austrian central bank on Monday. Because a relatively small number of Western European groups — including three Austrian — own most of the banks in the bloc, there is the risk of a “domino effect” that could let a crisis spread quickly from one country to another, it said.
But as the region’s banks have strong capital ratios, profitable business models, and a relatively low dependence on wholesale refinancing, there are currently no signs of an imminent crisis, the study said. “How capital flows into (emerging Europe) will develop depends on the financial strength of the parent groups and of the sister banks, and on whether the parents are willing and able to fund their subsidiaries,” said the study, published in the central bank’s half-yearly Financial Stability Report.
“The risks to refinancing are increased by the danger of a domino effect, because a large part of the foreign capital in many countries comes from a relatively small number of Western European banks,” it said.
The study, based mostly on data from the first half of the year — before the global financial crisis hit Hungary and other countries in October — also highlights the contagion risk that comes from the fact that many of those banks are active in several countries at once.
“Another possible trigger for a crisis … could be problems at a sister bank (in another country), because there is the risk of a domino effect inside a banking group,” it said. However, the risk of an abrupt withdrawal of capital from emerging Europe, which had spiked in October when investors dumped Hungarian assets, was now contained thanks to aid programs installed by the International Monetary Fund, it said.