Agreement with Banks Limits Crisis in Emerging Europe

• Author: Camilla Andersen
• Position: IMF Survey online

But this series of meetings, aimed at preventing foreign-owned banks from pulling out of emerging Europe, has played a vital role in helping avert a systemic crisis. So far, 15 parent banks have made specific rollover and recapitalization commitments in five countries-Bosnia, Hungary, Latvia, Romania, and Serbia-all of which have stabilization programs supported with funding from the IMF and, in some cases, the European Union.

In this interview, two of the key players, Erik Berglöf, chief economist at the European Bank for Reconstruction and Development (EBRD), and Anne-Marie Gulde, senior advisor in the IMF's European Department, discuss the impact of the initiative, known informally as the "Vienna Initiative" because of where the first meetings were held.

A crisis waiting to happen

When the global financial crisis swept the world in 2008, many countries in emerging Europe proved vulnerable because of high levels of private debt to foreign banks and foreign-currency exposure.

Policymakers in the region became increasingly concerned that foreign-owned banks, despite their declared long-term interest in the region, would seek to cut their losses and run. The banks themselves were also getting worried: Uncertainty about what competitors were going to do exacerbated the pressure on individual banks to scale back lending to the region or even withdraw, setting up a classic collective action problem.

Under these circumstances, bank behavior was clearly key to macroeconomic stability. Previous crises had amply demonstrated that unwillingness by foreign banks to roll over loans and maintain trade and other credits has the power to precipitate sovereign defaults and currency runs. A sudden outflow of capital from emerging Europe therefore clearly had the potential to escalate into a full-blown balance of payments crisis with potentially devastating consequences for countries there, especially those already hard hit by recession.

Addressing the collective action problem

In the face of these risks, the European Bank for Reconstruction and Development (EBRD), the IMF, the European Commission, and other international financial institutions initiated a process aimed at addressing the collective action problem. In a series of meetings, the international financial institutions and policymakers from home and host countries met with commercial banks active in emerging Europe to discuss what measures might be needed to reaffirm their presence in the region in general...