Ten Years of the Vienna Initiative 2009-2019
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Ten years of the Vienna Initiative 2009-2019 Initiative Vienna of the years Ten Ten years of the Vienna Initiative 2009-2019 Ten years of the Vienna Initiative 2009-2019 This volume is published by the European Investment Bank on behalf of the Vienna Initiative Steering Committee. Ten years of the Vienna Initiative © European Investment Bank, 2019 98 -100, boulevard Konrad Adenauer – L-2950 Luxembourg 3 +352 4379-1 U [email protected] www.eib.org twitter.com/eib facebook.com/europeaninvestmentbank youtube.com/eibtheeubank All rights reserved. All questions on rights and licensing should be addressed to [email protected] Disclaimer The views expressed in this volume are those of the authors and do not necessarily reflect the position of the European Investment Bank. Print: QH-02-19-820-EN-C ISBN 978-92-861-4393-9 doi: 10.2867/497184 eBook: QH-02-19-820-EN-E ISBN 978-92-861-4365-6 doi: 10.2867/090735 PDF: QH-02-19-820-EN-N ISBN 978-92-861-4370-0 doi: 10.2867/197475 II Table of contents Introduction: Managing a supra-national public-private 1 platform still based on sovereign interests Boris Vujčić, Chairman of Vienna Initiative PART I. HISTORICAL PERSPECTIVES 11 1. Ten years of the Vienna Initiative: a chronology 13 Mark Allen 2. Reflections on multi-country and multi-player issues 53 Erik Berglöf, Anne-Marie Gulde-Wolf, Piroska Nagy-Mohácsi and Thomas Wieser 3. A perspective from the World Bank Group 71 Fernando Montes-Negret, Jean-Marie Masse, Mario Guadamillas, Miquel Dijkman, Matija Laco and Alena Kantarovich 4. The European Investment Bank and the Vienna Initiative 91 Luca Gattini, Áron Gereben, Debora Revoltella and Paolo Munini 5. The Vienna Initiative: how it all started 99 Herbert Stepic PART II. THE EFFECTIVENESS OF THE VIENNA 103 INITIATIVE DURING THE 2009-11 CRISIS 6. If you really want to find a solution: a personal story 105 of the Vienna Initiative from a Hungarian eyewitness Julia Király 7. Lessons from the global financial crisis in the context 125 of the Vienna Initiative Vizhdan Boranova, Jörg Decressin, Sylwia Nowak and Emil Stavrev 8. FX-denominated loans in Central, Eastern and Southeastern 137 Europe: a risky but unavoidable step in the transition Olivier de Boysson 9. The Vienna Initiative: from short-term impact 145 to long-term solutions Ralph De Haas and Peter Tabak Part III. VIENNA INITIATIVE 2.0: POST-CRISIS 161 STRESSES ON CROSS-BORDER BANKING 10. Supervisory and regulatory changes since the crisis 163 and the Vienna Initiative Filip Keereman, Daniel Kosicki and Corina Weidinger Sosdean III Ten years of the Vienna initiative 2009-2019 11. Cross-border banking in Central, Eastern and Southeastern Europe 177 through the lens of the EIB's Bank Lending Survey Luca Gattini, Áron Gereben and Debora Revoltella 12. The Non-Performing Loans Initiative: 199 progress since its launch in 2014 Bojan Marković, Eric Cloutier and Jure Jerić Part IV. THE FUTURE OF CROSS-BORDER BANKING 223 13. Ten years of the Vienna Initiative: 225 the future from a banking group’s perspective Christine Würfel and Barbara Atroszczak 14. Cross-border banking in North Macedonia: 239 a country perspective Anita Angelovska Bezhoska, Ana Mitreska, Frosina Celeska and Ljupka Georgievska 15. Reforming the banking sector in Albania in the light of 277 the Vienna Initiative Gent Sejko 16. European cross-border banking after the crisis 297 Michael Teig and Erik F. Nielsen Part V. CONCLUSIONS ON THE ACHIEVEMENT 311 OF THE VIENNA INITIATIVE 17. Success and failure of the Vienna Initiative mechanism 313 and similar arrangements Filip Keereman, Daniel Kosicki and Corina Weidinger Sosdean 18. Financing sustainable growth in a small economy with large 329 cross-border financial links: the role of the Vienna Initiative Paweł Gąsiorowski and Olga Szczepańska 19. Forward-looking implications of the Vienna Initiative: 345 why did Western banks enter the Central, Eastern and Southeastern Europe region, what went wrong and what did we learn? Gunter Deuber and Rachel A. Epstein ANNEXES 363 Conference on the tenth anniversary of the Vienna Initiative: a summary 365 People principally involved in the Vienna Initiative 381 IV Introduction Introduction 1 Managing a supra-national public-private platform still based on sovereign interests Boris Vujčić Governor of the Croatian National Bank and Chairman of the Vienna Initiative The Vienna Initiative is a unique project, a platform that consists of representatives of international financial institutions, national and supranational regulators and industry representatives who meet regularly to exchange views on financial trends in a group of European countries. It has been an interesting and successful experiment. None of the participating institutions has a formal obligation to attend and there is no money on the table, yet all old stakeholders, and some new ones, ten years after the crisis that created the Vienna Initiative, are still happy to go on. People vote with their feet, it is often said, and in this sense the support provided by various stakeholders suggests that they have recognized the Vienna Initiative as a purposeful platform for coordination and information exchange. In particular, the strong involvement of Western European banks confirms that they have a long-term commitment to the Central, Eastern and Southeastern Europe (CESEE) region, despite the controlled deleveraging that took place in the aftermath of the global financial crisis. The historical role of the Vienna Initiative The desire to protect CESEE countries from disorderly deleveraging was the original motive for establishing the Vienna Initiative. The region was in a vulnerable position at the onset of the global financial crisis. Following several years of credit- driven economic expansion, many of these countries suffered from severe internal and external imbalances. Part of the blame for the unsustainable expansion of CESEE countries rests with Western European banks. Specifically, banks from advanced EU Member States borrowed at low rates in European money markets and channelled these funds to their subsidiaries in CESEE. In addition, they fought 3 Ten years of the Vienna Initiative 2009-2019 aggressively for market share by lowering lending standards. Such a combination resulted in excessive credit growth. Demand-side factors also contributed to the credit expansion, as the propensity to borrow in CESEE was high due to relatively low interest rates and overly optimistic expectations regarding the convergence potential of these countries. The outbreak of the financial crisis in late 2008 and the consequent global recession hit the CESEE region very hard. External demand weakened considerably, while domestic demand collapsed due to a significant drop in confidence and a sharp slowdown in credit growth. The need to eliminate excessive imbalances further contributed to the contraction of domestic demand in some CESEE countries, as they were no longer able to finance these imbalances by borrowing extensively from abroad. Due to weak fundamentals, almost none of the countries concerned had sufficient space to engage in fiscal loosening that could have helped mitigate the recession. On the contrary, most of them were forced to tighten fiscal policy in the midst of the crisis in order to preserve debt sustainability and restore investor confidence. An additional problem for CESEE countries was that, in the context of lower capital inflows and diminishing investor confidence, their national currencies faced depreciation pressures. While in advanced countries depreciation of the currency in times of recession is typically considered beneficial because it can stimulate recovery by increasing net exports, in emerging market (EM) countries currency depreciation often only makes things worse. The reason is that economic agents in emerging market countries, including the CESEE region, are typically heavily indebted in foreign currencies. If, for some reason, the value of domestic currency were to decline substantially, these debts would become more expensive to service. A sharp drop in disposable income caused by increased debt repayment costs would far outweigh the gains resulting from improved price competitiveness, thus exacerbating the economic downturn. Therefore, CESEE countries were confronted with numerous challenges both domestically and externally. In such a difficult environment, the decision of foreign banking groups to maintain their presence in the region had a great positive impact. On the one hand, it enabled private and public sector entities to retain access to financing at the peak of the crisis, when the availability of external sources was limited. On the other hand, the foreign banks’ decision to maintain their investments in CESEE reduced the likelihood of detrimental currency and debt crises. Had large banking groups had not made that decision, the withdrawal of 4 Managing a supra-national public-private platform still based on sovereign interests foreign currency liquidity from CESEE would have been so large that central banks would have likely failed to defend national currencies from severe devaluations. In such a scenario, not only would the private sector borrowers have struggled to service their foreign currency indexed loans, but also public debt sustainability would have come into question. The success of the Vienna Initiative illustrates how an ambitious coordinated effort can lead to a positive outcome with substantial benefits for all parties involved. Of course, the question remains what would have happened if it were not for the Vienna Initiative, but that we shall never find out. Although from the perspective of individual banks it seemed reasonable to exit overheated markets in CESEE, a simultaneous withdrawal of many banks would have imposed such a heavy toll on the CESEE economies that the banks’ investments in the region would quickly lose value. Due to the size of cross-border operations, for some banking groups large credit losses in the region could have jeopardized the solvency of the parent institution. In such a context, it was in foreign banks’ best interest to keep supporting these economies.