FXstreet.com (Barcelona) - European banks across the region continue to hold large amounts of short-term external debt. Admittedly, the ECB’s new Outright Monetary Transactions (OMTs) policy has reduced the immediate threat of a full-blown financial crisis in the euro-zone, which, in turn, has eased the risk of financial contagion to Emerging Europe. However, according to Liza Ermolenko, Emerging Markets Economist at Capital Economics, “We fear that the OMTs will just delay a further deepening of the euro-crisis. If we are right and tensions in the euro-zone do escalate, it would become markedly harder for banks in Emerging Europe to roll over their debt.”
In any scenario, “it appears that deleveraging from Western European parent banks in the region is already underway, and has only intensified over the past few months. We estimate that around €15B flowed out of the region’s banks over the past year or so, mainly in Central Europe and Russia.” she adds. What’s more, capital outflows from banks failed to reverse even when the ECB’s LTROs eased market strains earlier this year.
“In summary, while the recent actions from the ECB and the Fed mean that the immediate risks to Emerging Europe’s banks have eased, we remain cautious. The process of gradual deleveraging by Western parents continues to cast a long shadow over the outlook for the region’s banking sector.” Ermolenko warns. Credit conditions are already extremely tight, and with banks still vulnerable to a deterioration in external conditions, worse may be yet to come.
In any scenario, “it appears that deleveraging from Western European parent banks in the region is already underway, and has only intensified over the past few months. We estimate that around €15B flowed out of the region’s banks over the past year or so, mainly in Central Europe and Russia.” she adds. What’s more, capital outflows from banks failed to reverse even when the ECB’s LTROs eased market strains earlier this year.
“In summary, while the recent actions from the ECB and the Fed mean that the immediate risks to Emerging Europe’s banks have eased, we remain cautious. The process of gradual deleveraging by Western parents continues to cast a long shadow over the outlook for the region’s banking sector.” Ermolenko warns. Credit conditions are already extremely tight, and with banks still vulnerable to a deterioration in external conditions, worse may be yet to come.
