A statement from the National Bank of Austria (OeNB) to Austrian banks operating in CEE has created panic. It has such an impact that the Romania president said this today:
“I think that the statement of the OeNb demanding that financing of subsidiaries of Austrian banks located outside the euro zone is stoped, is either a mistake or a misunderstanding.”
“To come today and declare that you are not going to continue financing your activities in Romania it shows a total lack of understanding of the current situation. It is a lack of fair-play and I want to believe that countries joining EU at a later date will not have to pay for the banks’ greed”
“Austrian banks made huge profits from 2000 until 2009 and they cannot come today and stop the financing of the Romanian economy. They have to use the financing mechanism offered by EU in order to continue financing the Romanian state, local companies and households. “
Very strong and bitter words from our President. Unfortunately, they are missing the point and also the good side of all that is happening. I am not sure who is advising our President but they should have not allowed this message.
Before going further this is what OeNB advised its banks (my bold):
“To promote the subsidiaries’ refinancing structure, credit growth will in the future be conditional on the growth of sustainable local refinancing (comprising mainly local deposits, but also local issuance activity and supranational funding, e.g. by the EBRD or the EIB).In the future, subsidiaries that are particularly exposed must ensure that the ratio of new loans to local refinancing (i.e. the loan-to-deposit ratio including local refinancing) does not exceed 110%.”
What is happening? Believe it or not, this could turn out to be a good thing for Romania if our officials meant what they said when talking about lending in RON, higher economic growth, lower inflation and smaller budget deficit.
Here is my take on all this (I hope at time the strong sarcasm will not hit you too hard).
First, it is true that banking sector in Romania was profitable for few years. It is also true that they paid taxes for those years and thus Romanian state has nothing to say about the magnitude of those profits. In the same time it is also true that since 2009 those banks made quite big losses and are expecting more. In the end I am not sure how much of the profit made before the crisis will be left.
Second, the Vienna accord from Spring 2009 forced banks to keep their exposure at that time to Romania. Did it help the Romanian economy? No. The only result was that the Romanian government could run a big deficit and finance it without being pushed by the market to reform.
Third, Mr. Vasilescu from NBR when talking about the Greek banks in Romania said that they are Romanian banks with Greek owners and thus they should not suffer from capital withdrawal. The same principle should be used here. We are looking at Romanian banks with Austrian owners and by analogy the lack of extra funding from their headquarters should not scare us. They will be funded locally.
Fourth, those are good banks, I am told. Should they need financing then nothing stops them from listing on the stock market or issue bonds. All they need is a rating. Then they will compete with other banks for EURO if they need to increase their lending portfolio. We talk about banks, people. More so, independent subsidiaries, managed by top notch professionals. Finding financing to expand their plans should not be a problem. They made huge profits here based on expertise not on monopoly pricing. They could do it again.
Fifth, and this is the best result in my view, the advice from the OeNB offers an unexpected lifeline to RON. Here is why. The financing from Austria was in euro. But as we all know, euro lending is not supported by either NBR or the local banks. So, less euro in the local market should drive the price of new loans in this currency higher. Current loans should still be priced out of EURIBOR and a fixed margin so they should not be affected.
This is the chance for RON. The supply of RON is the monopoly of the NBR and the best part is that it is infinite. With euro becoming scarce the door is open for RON to finance the Romanian economy. I know that until now everyone was saying that RON was expensive. However, adequate liquidity management from the NBR the price of RON should be just right (isn’t it?). Furthermore, the good news keeps on coming, the inflation forecast for Romania shows an inflation path that will not pass the 3% mark again in the next two years. Thus, no reason for higher interest rates in RON.What better environment for RON lending?
Now I come back to our President. I simply do not understand the frustration. As I said, our prayers have been answered: euro is out RON is in. And even the risk of not being able to finance the deficit is eliminated as the budget deficit for 2012 is set at 1.9%. In the same time, we are told that the number of public employees will fall. Not to mention expectations of an economy growing at 2%.
In conclusion, why are we so worried.? The banks are not Austrian are Romanian. The lending recommended by our officials and super-bankers is in RON. NBR does a wonderful job managing liquidity and the inflation forecasts supports lower interest rates in RON. The budget deficit will be one of the lowest in decades so the government will need less money for financing and we will finance it in RON, our currency.
After all these rush of good news, I have to wonder: Is it possible that all this anxiety comes from our policy makers not trusting their forecasts of : economic growth, inflation and budget deficit?
A friend has warn me that my post is too ironic and thus I might be taken seriously. I see from your comments that he was right.
Through this post I wanted to expose the hypocrisy present in our policy makers’ speech. That’s all. If there is big financing problem either in RON or in EUR then the president should know the people responsible for this situation. I am sure that neither myself nor the OeNB advised to borrow in EUR as a Romanian Government in the short term in RON. We might not like it but capital will always search for the best return considering the risk. Everything else is just politics.
Thus, take this post as it is, a call and a raise on the governments’ bluff that all is good with Romania, our banking sector and our economic policies.
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