BY REQUESTING SOMETHING QUITE NORMAL, Mugur Isărescu seems to be announcing something unusual

All the signals point to a process of disintermediation for the financing of local branches of by the parent-banks which is inherent, Mugur Isărescu, governor of the National Bank of Romania (NBR) said yesterday, at the annual conference of the Romanian Association of Financial Banking Analysts (AAFBR). He said:

"Banks which are extremely dependent on parent banks need to find alternative sources of financing".

Is this commandment something unusual?

When a company sets up an office, a branch in another country than its country of origin, does it intend to finance the new entity "pour toujours"?

Isn't it normal that in fact it wants to create a new profit center, that would be self supported financially?

Of course, it wants to self-support itself.

If the normal way to do things is to be self-supporter, than why does the Governor of the Romanian central bank announce, in a banker-targeted forum, that it is time for normalcy?

Perhaps he is in fact trying to tell us something else but he can't afford to?

Perhaps he lacks the words?

Perhaps he wants to say the opposite, that the funding of parent banks by their Romanian subsidiaries should stop?

• It is the local branches that provide funding to the parent banks, not the other way around

On June 16th, the BURSA newspaper wrote the following:

"The terms of the Vienna Initiative, the agreement concluded in 2009, which required the parent banks of the Romanian lenders to support their subsidiaries and not to pull out capital, seem to have been reversed in the case of the Greek financial groups, Japanese bank Nomura" states.

At that time, BURSA reported that the Nomura report said: "At the moment, the Romanian subsidiaries have been already supporting their Greek parent banks for some time" and "the loans granted by the Greek subsidiaries to parent banks have contributed to the appreciation of the leu and have reduced liquidity on the Romanian market. Capital outflows cause problems for the balance of payments, requiring the use of reserves or, in the case of Romania, the accessing of the funds of the stand-by precautionary agreement, the Nomura Report states".

From this point of view, the speech of NBR Governor Mugur Isărescu, announcing something normal- that the branches of foreign banks need to be self reliant in terms of financing -, seems to be in fact announcing something unusual: that following the situation in Greece, the capital outflows from Greek banks we may need to access the funds of the precautionary Stand-By agreement.

In a piece of news published by BURSA yesterday, we showed that in September, the Greek banking system saw withdrawals of 5.5 billion Euros, a record even though withdrawals have been going on for several months.

Yes, of course, he is not referring to parent banks no longer providing loans to their domestic branches, but rather Romania has reached the time when it can no longer bear the capital outflows from the domestic branches of the Greek banks.

Otherwise, what Isărescu says has no meaning at all ...

• Nomura's scenarios and the one it hasn't anticipated

This summer, Nomura conceived several scenarios concerning the consequences of the Greek crisis for Romania and Bulgaria.

The first scenario consists of the severe reduction in lending in their Romanian and Bulgarian branches by Greek banks, due to increasingly higher funding needs from the parent banks. This is anti-growth for Romania and Bulgaria, though arguably it has already started to occur.

Another scenario would involve Greek banks being forced to consolidate, perhaps into some form of good bank/bad bank set-up. Such a consolidation could cause asset sales in Bulgaria and Romania. With limited foreign interest likely, government or domestic money would be needed, meaning net currency outflow. If a sale was not possible capital withdrawal would then be likely, Nomura considers.

This leads to the next scenario, named as "a very bad outlook", where Greek banks would be forced to take out capital from their subsidiaries to consolidate their financial situation.

Greek banks might opt for a different solution, namely removing support from their subsidiaries which could cause them to default (in which case the EBRD and the governments of Romania and Bulgaria would be forced to intervene and nationalize the banks or cause consolidation in Romania to absorb the banks.

The most pessimistic scenario anticipated by Nomura is the default of the Greek banks, which would mean parent company support is removed, capital is withdrawn, there is a fire sale of Emerging Europe assets. (Even if Greek banks were nationalized or bailed out the Greek government may not really want to support Romanian and Bulgarian?)

The subsidiaries of the Greek lenders Alpha Bank and EFG Eurobank Ergasias (Bancpost) are among the top ten largest Romanian banks. The market has three smaller lenders, namely Banca Românească (National Bank of Greece), Piraeus, ATEbank and Emporiki (owned by Credit Agricole).

One scenario which Nomura did not anticipate in June, is that yesterday, Moody's put Nomura Holdings, Inc. on watch, for a potential downgrade.

So we can choose not to believe what the Japanese said about us.

• Isărescu: "We need to avoid a tightening of lending conditions"

NBR governor Mugur Isărescu yesterday said, at the annual conference of the Romanian Association of Financial Banking Analysts (AAFBR), that there si a paradigm shift: "You've got different data, you've got stable macroeconomic conditions, but you find that banks aren't that generous anymore. We need to get ready for "deleveraging", because it is inherent. This is what all the signs are pointing to. It is unfair. (...) We need to avoid a tightening of credit conditions ("credit crunch"). A strong reduction of the involvement of banks with foreign capital in the economy would create a "credit crunch". We need investments first to see to what extent we need "funding". (...) In my opinion, our thinking needs to become a bit more flexible".

Yesterday, Mugur Isărescu reinforced the message which he conveyed in the beginning of the week, that parent banks are no longer "generous" with the local subsidiaries, because they are facing problems. He mentioned that the decisions of the NBR concerning the interest rate will also be transmitted to the commercial banks, because they will need to "rely on resources found on the domestic market".

"They need to balance their resources and loans", according to Mugur Isărescu.

• • Isărescu: We need to stimulate savings and consumption

The NBR governor yesterday explained that domestic saving needs to be stimulated. He said: "We must stimulate consumption and saving. The volume of domestic savings depends on revenue levels. How can we be judicious and stimulate saving while at the same time stimulating consumption, not discouraging it? With care. The formulas need to be weighed very carefully and there is a need for an adequate dosage of balanced policies".

• • Isărescu: About 20 billion Euros of Romania's debt comes from its citizens

Mugur Isărescu also discussed Romania's debt, for which some voices claim the NBR bears the blame

He said: "When people start talking about Romania's debt, they act as if it God himself conjured it out of thin air and they blame the Romanian National Bank for it. The banks are in a tight spot, the government is in a tight spot, so are businesspeople, even the NBR is cornered. As big as our reserve is, we are only exploiting half of its capacity. When we speak about debts, please tell Romanians that when one takes a loan a debit is created. When it gets to debts, it's like God himself up in the sky created it and everyone blames it on the National Bank. Once you start mentioning how it came to be, even in very technical terms, the debt of 90 billion Euros, of which 20 billion Euros come from the population, everyone gets very angry. Didn't the few million cars created in leasing create a debt? Aren't leasing contracts debts as well?', the NBR official said.

Mugur Isărescu added that the resumption of lending which everyone wants so much will do nothing else but create other debts, and in this case the population needs to be prepared to manage such loans.

He added: "We all want lending to resume, but we need to be aware that there will be a debt created on the other side of the ledger. It is an economic crime to inflate an economy and then squeeze it to death to pay off a debt. We need to present to society the solution to manage a loan. Romania has a foreign debt of 90 billion Euros, but this can't be compared to what happened before. Almost 30 billion Euros of that debt comes from Romanian companies, about 20 billion come from the population and the rest is created by the banks. Part of the foreign debt comes from the loans denominated in foreign currencies which the National Bank tried to slow down. Our foreign debt is just big enough for us not to be concerned. I think that you, as financial and economic analysts have a responsibility in this respect".

The governor said that we are entering a period which can be called "the new normal": "The economy of developed countries seems to be frozen by low growth, despite unprecedented efforts. All the principles of monetary policy have broken. We used unorthodox a few years ago, non-conservative measures, non-standard, quantitative easing" (...) The developed economies aren't growing. Eventually we get to the size of the sovereign debt. There are major issues with the public debt in Japan, the US, the UK, where these figures tend to balloon faster. This new normal defines an economy which is growing as much as it needs to avoid conflicts, major shocks, but not enough to cause the creation of new jobs".

• • Demetrios Efstathiou, (RBS): It is hard to believe that Romanian banks with Greek capital could transfer their capital to their parent banks

It is hard to believe that the Romanian banks with Greek capital could move it to their parent banks, because it is not something that is easily done, but a capital reduction could happen due to a contraction in the loan portfolio, Demetrios Efstathiou, analyst at Royal Bank of Scotland (RBS) said on Wednesday, in a specialized press conference.

"Speaking about Greek banks, I have talked to my colleagues about moving the capital from here to the parent bank, and the answer was negative. It is hard to move capital, but we could speak about a capital decrease because the loan portfolio isn't growing. But there is also the question on how big a Romanian branch compared to one in Italy and how much would its capital help support the parent bank?', Efstathiou said.

John Morton, Bloomberg analyst, added that the banks need to regain their equilibrium, and this can not be achieved by moving capital.

"It is beyond doubt that we have a major problem in Europe concerning deficits and the financing and refinancing of these deficits. Countries outside the Eurozone are lucky, in a way. Outside the Eurozone, things are looking a bit different. The market has become more nuanced, and the countries outside the Eurozone have greater perspective for growth and the markets have become aware of this. Banks need to regain their balance, but can this be achieved by moving capital? No, this is not the solution', Morton said.

On the other hand, Lucian Croitoru, advisor to the Governor of the Romanian National Bank, (NBR), said that most foreign banks have come to Romania for the long term and are not about to shoot themselves in the foot.

"Many foreign banks have come to Romania to invest in the long term and found resources to grow their business here. They are not looking to harm themselves because of the crisis', Croitoru said.

• • The Guardian: Banks are withdrawing to their countries of origin

Affected by the crisis, European banks have begun pulling back to their countries of origin, a situation which is reminiscent of the protectionism which swept across Europe during the Great Economic depression of the "30s, and which is giving cold chills to countries in Eastern Europe, a study by "The Guardian" finds.

Commerzbank, the second largest German bank, will begin refusing to lend outside Germany and Poland. "We need to focus on supporting the German economy, while other banks are withdrawing", Commerzbank CFO Eric Strutz said, quoted by Mediafax.

On Tuesday, Lloyds Banking Grup, a British bank focused mostly on its local market, admitted to having reduced its exposure to banks in the Eurozone, while Citi analysts warned that political and financial pressure will force European banks to withdraw to their home markets.

The head of HSBC, Stuart Gulliver, expressed concern that Asia might be hurt if European banks faced further pressure in a scenario he described as "a mini credit crisis". "We need to be careful, and monitor the risk of a massive contraction of credit by European banks due to the events on their home markets", he said.

BNP Paribas and Societe Generale, the largest French banks, have announced that they will sell assets worth 150 billion Euros.

Meanwhile, Italian group Banco Popolare put up for sale its Hungarian branch, but found no buyer.

Lloyds, who acquired mortgage lender HBOS in 2008 to help the British banking sector avoid a dangerous bankruptcy, will close and move off balance sheet loans amounting to billion Euros to Irish borrowers, in an attempt to pull out almost completely from this market. The British group recently announced that the base capital ratio climbed to 10.3% in the third quarter, up from 10.1%.

"Did Lloyds increase its capital? No. Can it convert its profits to equity? No. It is strengthening its capital adequacy ratios by reducing its assets, which shrank from 383 billion pounds to 372 billion pounds. It is clear that banks like Lloyds are focusing on reducing their portfolio, so it is unavoidable that, if they will prioritize lending in their home market, they will be less willing to lend outside Great Britain", an analyst of Evolution Securities says.

The hunkering down of banks to the domestic markets represents a complete reversal of the trend which began after the implementation of the Euro.

The market for syndicated loans, by which banks partner together to grant cross-border loans to companies, is in accelerated contraction process.

John Beck, manager at Franklin Templeton, who manages over 300 billion dollars in bonds, warns that Europe could return to autarchy, to the self sufficiency of the '30s, when countries were giving up on the gold standard and were racing to debase their currencies.

• • Deutsche Bank assigned a loan of 86 million Euros to Erste Bank

Deutsche Bank has assigned a loan of 86.3 million Euros, backed by government guarantees, which it granted to the county of Suceava to finance the project "Utilities and environment at European standards", to Erste Group Bank. The public administrator of the county of Suceava, Irina Vasilciuc, yesterday said that the County Council of Suceava was notified Deutsche Bank AG, the London branch has transferred and assigned the loan agreement to Erste Group Bank AG Viena, which has thus become the new creditor.

According to a statement made by Irina Vasilciuc quoted by press agency Mediafax, the local authorities have repaid three installments of 6.3 million Euros out of the total loan of 86.3 million Euros, and the humongous amount of 39.9 million Euros in interest. We had no time to check this figure, but this is something to be amazed at.

79.9 million Euros need to be repaid, as well as the afferent interest.

The loan agreement was concluded on March 26th, 2004 in order to finance public investments of local interest as part of the "Utilities and environment at European standards" project, which had the backing of the government.

The loan agreement stipulates the loan would have to be repaid in 25 years, with a grace period of five years, with an interest rate of 3.975% plus the EURIBOR rate. The loan arrangement fee was 1.05%, and the non-usage fee was set at 1.5%.

On July 8th, 2004, Deutsche Bank AG London fully transferred its rights and obligations to Deutsche Bank Luxembourg SA, and on October 29th, 2010, Deutsche Bank Luxembourg transferred these rights and obligations to Deutsche Bank AG, the London branch, which regained its status of lender.

On October 13th, 2011, Deutsche Bank AG London concluded an agreement for the transfer of rights and obligations with Erste Group Bank AG, for an amount of 79.985 million Euros.

With the help of this loan, in several cities of the county of Suceava several investments were made in the heating system of the district as well as adductions to the natural gas networks.