Crisis Fears Overblown In Eastern Europe

Banks are poised to lose a lot of money in the once-fast growing region, but don’t expect them to bail just yet.

LONDON–With the way Eastern European currencies and bank shares have dropped this week, it seems as if investors are expecting a full-blown financial crisis to hit the region and that Western European banks that had established themselves there are going to cut and run.

Is such a nasty form of economic decoupling set to happen?

For now, the answer looks like “no.” However, it is difficult to gauge the extent of the bad loan risks faced by the biggest banking operations in Central and Eastern Europe, which include UniCredit (other-otc: UNCFF – news – people ), Societe General (other-otc: SCGLY – news – people ) and Erste Bank (other-otc: EBKDY – news – people ).

“We really don’t know what’s going to be the peak cycle loan-loss charge,” said Pedro Fonseca of Keefe, Bruyette & Woods. “A lot of these foreign banks have made a lot of money in this region. They are not going to exit these markets, which hold a lot more promise than at home,” he added. “What you will see is more careful lending.” BNP Paribas has started trimming back operations in Ukraine and refocusing its efforts on collecting loans. (See “BNP Stung By Ukraine.”)

It is probably also unwise for foreign banks to make the call on staying or ditching Eastern Europe, because the economic and lending situation there is so unprecedented–it is incomparable to the environment preceding the Asian financial crisis because Western and Eastern European economies are so intertwined.

Western banks will also be wary of upsetting the central bankers and governmental authorities in Eastern Europe, Fonseca said, since they could make life difficult for those lenders if they ever chose to come back to the region.

Investors in banks like Raiffeisen International (other-otc: RAIFF – news – people ) and Erste Bank nevertheless fear that their profits will be hit by an increase in loan defaults, many of which could come from loans made in foreign currencies like the Swiss franc that have became more expensive to pay off for Eastern European borrowers as their local currencies have been slammed by capital flight from the region.

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