As Germany takes the rotating EU presidency, Chancellor Angela Merkel Noted that the bloc faces a triple challenge: the coronavirus pandemic – receding but still requiring constant vigilance – the most brutal economic downturn on record by the EU and political demons waiting behind the scenes, including the specter of the populism. With the pandemic somewhat under control, the attention of European policymakers is turning to the ripple effects of months of lockdown.
The economies of Central, Eastern and South-Eastern Europe (CESEE) are in a particularly precarious situation, as a number of factors, ranging from bad debts to populist legislation, limit the capacity of the banking sector, which plays a major role. essential role in stabilizing the economy with loans, payment holidays and other forms of financial support to local businesses in times of crisis – to withstand a possible economic downturn.
Bad debts on the rise
A disturbing report recently published by the Vienna Initiative (created during the 2008 financial crisis to support emerging Europe’s financial sector) indicated that CESEE banks are facing a wave of doubtful debts, or Non-Performing Loans (NPLs), caused by the COVID-19 pandemic which could last after 2021. The bad debt problem is by no means limited to CESEE countries, but the problem is exacerbated by populist political decisions in many countries in the region.
European banking regulators had previously estimated that EU banks had provided adequate buffers to deal with a number of bad loans, with “strong capital and liquidity buffers” that should enable them to “resist potential risk losses credit “. But many banks in the CESEE region, operating in more volatile economies and with their reserves already reduced by populist measures, are particularly vulnerable if they are hit by too many NPLs.
At the heart of the problem is the fact that an excess of NPL can deplete banks’ capital reserves, making them dependent on support from governments and central banks. If regulators and politicians do not then put in place the necessary measures to support the banks, the entire economy could be in danger of collapsing.
Lenders from countries like Hungary, Czech Republic, Croatia, Slovakia and Bulgaria have sought to be reassured from national authorities in recent months that they will receive the necessary protections if the COVID-19 restrictive measures last much longer, especially if the continent is hit by a second wave of the virus before an effective vaccine or treatment is found . At present, it is not clear whether European governments will be ready to continue with the same level of support for businesses and employees.
It’s not just about renewing the special coronavirus provisions. In return for additional financial support for businesses, lenders naturally expect reciprocal action from governments and central banks. These include favorable tax measures, or easing of excessive levies, so that banks are able to maintain their reserve levels, a reduction in countercyclical capital buffers and a guarantee of emergency financial support from central banks if needed.
Populist measures exacerbate financial tensions
In the wake of COVID-19, the outlook for the banking sector has already been revised to negative in several countries including Poland, Hungary, the Czech Republic and Croatia. These problems risk being intensified by populist political decisions in many CESEE countries, where governments tend to view punitive measures against banks as an easy way to build popular support.
In particular, many financial sectors in CESEE countries are still suffering from the 2015 decisions to convert loans taken out in Swiss francs into loans denominated in euro or local currency. The conversions came in response to a sudden rise in the value of the Swiss franc, which previously allowed lenders to offer low-interest loans. Forced conversions have benefited borrowers but left the country’s banks footing the bill, making it difficult for them to build capital reserves.
While some countries that have forced loan conversions, such as Hungary, have at least provided lenders with central bank euros to mitigate the blow, others, such as Croatia, have let banks shoulder all of the cost. losses. Croatian loans conversion, adopted quickly before the 2015 parliamentary elections, was applied retroactively, imposing a bill of around € 1 billion on the country’s banks, many of which are subsidiaries of financial institutions elsewhere in the EU. One waiting court decision on whether Croatian borrowers who had taken out loans in Swiss francs could claim additional compensation could impose an additional 2.6 billion euros in losses on banks at the worst possible time.
The controversial loan swap is not the only policy undermining the capital reserves of CESEE banks either. As part of its coronavirus recovery plan, the Hungarian government announced a special tax on banks and multinational retailers in April. The additional bank tax amounted to HUF 55 billion ($ 176 million). Prime Minister Viktor Orban had previously announced the toughest COVID-19 measures in any country in Central or Eastern Europe, including a suspension of all loan repayments until the end of the year. The move ignored a call from the Hungarian OTP bank for a tax reduction to help banks cope with the fallout from the pandemic.
A number of other countries in the region, including the Czech Republic and Romania – although Romania later eliminated levy – have increased bank taxes in recent years, which has made it more difficult for financial sectors in these emerging economies to respond to the crisis and left them in a more precarious position if the effects of COVID-19 continue into 2021.
The financial sector in the CESEE region suffered greatly as a result of the 2008-09 global financial crisis, and a lot of work has been done in the interim to protect the sector from future downturns. The Vienna Initiative report, however, makes it clear that the region’s banks still face headwinds due to the COVID-19 crisis. Hopefully, CESEE policymakers take heed of the report’s findings and realize that trying to scapegoat banks in these uncertain times will only make them more vulnerable, leaving them ill-equipped to face the onslaught. defaults expected over the next 12 months.
The opinions expressed in this article are those of the author and do not necessarily reflect the editorial policy of Fair Observer.