* Hungarian proposal for regional crisis plan gets cool reception* Czechs say strong banking sector needs no outside help* Poles cite IMF credit line, pension reform, as shieldsBy Michael WinfreyPRAGUE, June 8 In an echo of four years ago in the runup to the global economic crisis, the European Union's strongest eastern members are ignoring calls for a joint approach on banking from weaker peer Hungary to address the threats of deleveraging and a credit crunch. In response to a Hungarian proposal to shield the region's banks from the effects of the euro zone debt crisis, Polish, Czech and Slovak policymakers are instead touting the defences they have built up since 2008. But even though their banking sectors are considerably more stable than Hungary's, their "differentiation" approach had little success at the height of the crisis in warding off a region-wide selloff, steep economic contractions and a retreat by western banks that continues to depress lending. Now Greece's possible exit from the euro zone after a June 17 election and a late scramble by the currency bloc's policymakers to save Spain's banks pose new risks. Hungarian Prime Minister Viktor Orban said he prepared a plan, to be presented at a late June meeting of EU prime ministers, on behalf of the Visegrad Four countries - Hungary, Poland, Slovakia, and the Czech Republic. But the plan, including access to foreign currency swap lines from the European Central Bank - key to countering a liquidity crunch if foreign lending lines are cut - stopping capital flows from central European banks to their parent banks, and making the reverse VAT collection system in the EU more flexible, has met with a distinctly cool response. Slovakia's Finance Ministry said it had never heard of it. Poland stressed its own measures, including its securing a flexible credit line from the International Monetary Fund and pension reform that should help reduce the budget deficit."Over recent years we have prepared ourselves for black scenarios," a Polish Finance Ministry spokesman said.
Czech officials said the strength of their banking sector rendered such a plan unnecessary. That stance is consistent with Prague's opposition to any steps that would infringe on its central bank's regulatory abilities, one that also applies to its rejection of a potential proposal for an EU banking union that would centralise those duties and create a fund to cover lenders across the bloc."As far as the proposals from Hungary's prime minister go... we see them, in view of the good condition of the Czech banking sector and the current economic situation, as uneccessary," Czech Prime Minister Petr Necas said this week. HUNGARIAN RISK Economists say there are three main channels of contagion from the euro crisis: markets, trade and banks.
By way of the first, the crisis knocked currencies up to a third lower against the euro in the nine months after the fall of Lehman Brothers and cut stock indices in half. Through the trade channel, weaker demand in the region's main western European markets pushed usually robust exports into the red, causing deep contractions in every country save Poland. But the main headache for policymakers has been a financial sector that is 60 to 90 percent owned by euro zone lenders from Austria, Italy, France and other countries who are now retrenching to boost capital in their home market units. Hungary has been hit particularly hard. With Europe's highest banking tax and a foreign currency loan burden that has grown due to weakness in the forint, among other issues, the country has seen lenders cut exposure faster than elsewhere."Hungary looks the most vulnerable, as banks' excessive deleveraging, deteriorating asset quality and adverse policy environment have pushed real loan growth rates to the corporates deep into negative territory, with no meaningful upswing expected before 2014," Jelena Vukotic, Eastern Europe Economist at Roubini Global Economics, wrote in a report. She pointed to Bank for International Settlements showing total cross-border exposure to the region fell by $14 billion in the fourth quarter. For Hungary, it was $6.8 billion, for a 12.3 percent reduction in bank claims in the fourth quarter.
Hungary's loan to deposit ratio is above 120 percent, a level economists say is risky, while Poland's is only slightly higher than 100 percent. In the Czech Republic and Slovakia, deposits exceed loans by a large margin, a fact regularly cited by policymakers as a reason for confidence in the country's lending sector."Given the solid fundamentals and the healthy state of the Czech banking sector, the Czech Republic does not need to join such an initiative. Our recommendation is unambiguously negative," Czech central bank spokesman Marek Petrus said. NO NEED FOR SAFETY NET? That was the same stance Czech, Polish and Slovak policymakers took in 2008 and 2009 when they argued, in the words of Czech Finance Minister Miroslav Kalousek, "that the region should not be looked at as a homogenous entity". Investors thought differently, selling assets across the region during major risk events such as when Hungary, Romania, and Latvia sought deals from international lenders. Fearing an emerging European banking crisis could spread west, euro zone lenders, international bodies and eastern regulators created the "Vienna Initiative", in which parent banks pledged to maintain exposure in their subsidiaries as part of aid packages backed by the EU and the IMF. Now those groups are discussing "Vienna 2.0", but analysts say the need for euro zone banks to recapitalise at home and the absence of 24.5 billion euros in commitments by western banks, which came under the previous initiative, means any deal will be weaker than the original version. Not all of Orban's proposal was rejected, however. Aside from measures to help banks, he said the Visegrad Four should take a joint approach to boost growth, crucial following first quarter data showing Hungary's economy contracted and the Czechs suffered a third quarter of recession."We will not oppose an open discussion about all the different measures that could help raise economic growth," Czech Prime Minister Necas said.