Austria, until now a model of budgetary discipline, could find itself at risk of contagion from a looming credit crunch in eastern Europe because of huge Austrian bank exposure in the region, analysts said Wednesday. "Among the banking systems in western Europe, Austria's is the most exposed, given the volume of loans in foreign currency to countries such as Hungary, Romania or Russia," said an analyst at CA Cheuvreux, Simon Quijano-Evans.
It was Moody's, the international credit rating agency, that sounded the alarm earlier this week. "From a creditor point of view, the Austrian banking system is most exposed as eastern Europe accounts for nearly half of that country's global bank claims," Moody's wrote, sparking a massive sell-off of Austrian banking stocks. Austrian banks have lent as much as 280 billion euros (351 billion dollars) to the countries of eastern Europe, equal to Austria's gross domestic product (GDP).
Much of the credit was denominated in foreign currency such as euros and Swiss francs. And the risk of default has therefore increased as the national currencies of Hungary, Romania and Ukraine continue to slide in value.
"Modernised banking systems in eastern Europe have only emerged over the past two decades and have not yet reached a similar level of maturity as their West European counterparts; this makes them more vulnerable in times of stress," Moody's said.
And "deteriorating financial strength of east European subsidiaries has a negative spillover effect on their west European parents." The warning sent Austrian banking stocks into a tailspin on the Vienna stock exchange on Tuesday, with shares in Erste Bank plunging 18 percent and shares in rival Raiffeisen International slumping 13 percent. Erste Bank chief Andreas Treichl insisted that the share price "has nothing to with our bank's real economic situation." Economic analyst and former head of the WIFO think-tank, Helmut Kramer, agreed that the share price movements were exaggerated.
Kramer conceded that banks should be prepared for major credit defaults in some countries, such as Ukraine or Romania. "But even a worst-case scenario of 400 billion euros in defaults would be manageable," Kramer said. To help cushion Austrian banks against the global crisis, the government set up a 100-billion-euro buffer last autumn. And since the beginning of this year, Vienna has been spearheading a campaign for an EU-wide bailout package for eastern Europe.
But Austria's efforts have fallen on deaf ears, both in other capitals such as Brussels, Berlin or Paris, and even in the countries that stood to benefit from such a package, such as Romania, Bulgaria, Ukraine or Croatia. Chancellor Werner Faymann and Finance Minister Josef Proell want the matter to be discussed at a meeting of European finance and economy ministers next month.
"We can't afford to wait for the worst to happen before we start talking about it," Proell said. CA Cheuvreux analyst Quijano-Evans agreed. "Co-ordinated action on the part of the EU is absolutely indispensible," he said. "But a lot of countries are still not aware of the full implications" of a default in eastern Europe.