LUCIAN CROITORU ON THE CAPPING OF LENDING TO SUBSIDIARY BANKS IN SOUTH-EASTERN EUROPE: "There will be recessionary implications for the Eurozone as well"

• Analysts: It will be hard for Romania to raise funding

The possibility of Greece, France and Italy limiting lending to their subsidiaries of Eastern Europe, as mentioned in a report by financial agency "Moody's", is a purely intellectual speculation game, because those countries did not officially announce that, said Lucian Croitoru, advisor to the Governor of the NBR.

He added, however, that if it were to come to that, the process could not be achieved in the short term, it could only be achieved in the longer run. Moreover, the restrictions of lending to the subsidiaries would not only affect Central and Eastern Europe, but the Eurozone as well, because the parent banks would be affected themselves, according to Lucian Croitoru.

Also, the possibility of parent banks stopping financing to their subsidiaries in this region does not imply maintaining the exposure to countries in Eastern Europe, which was announced on November 3rd-4th, the advisor to the Governor of the NBR said. He added that it was worth watching why the restriction of the parent banks is limited to the deposits of subsidiaries and does not include capital.

Austria's announcement that it would place restrictions on its banks when it comes to lending to their subsidiaries in Eastern Europe could be followed by other countries such as Greece, France and Italy, which will support their orientation towards lending in the local currency, with the quickest change being expected to occur in Hungary, Romania and Bulgaria, according to a report by "Moody's".

"We expect banks in Hungary, Romania and Bulgaria to require the quickest change in the business models, because they are far more reliant on financing in foreign currency from their parent banks. Moody's predicts that the new regulations could increase competition for deposits in foreign currencies in the aforementioned countries, diminishing net margin interest rates due to higher financing costs".

• Dragoş Cabat: "It will be hard for the government to find financing in the future"

Analysts consider that, if parent banks limit lending to their subsidiaries in Eastern Europe, the Romanian government will face problems in financing itself.

It was natural that Greece, France and Italy would follow Austria's model, analyst Dragoş Cabat said. The effect would be the tightening of lending denominated in Euros from now on: "Some money may be taken out of the country".

As the NBR has also introduced regulations for restricting lending in foreign currencies, such loans will become increasingly rare, according to the economic analyst. There is still the possibility of the leu being volatile, and customers keeping their deposits in foreign currencies, Dragoş Cabat added.

Another consequence of the decisions to stop the financing of parent banks to local subsidiaries is represented by the lower amounts which the government would be raise in the future, Dragoş Cabat said.

"It will be hard for the government to find funding in the future, as it will become more complicated", he said.

• Aurelian Dochia: "The state will not find financing at the expected costs anywhere"

Aurelian Dochia, economic analyst, said that there could be a problem with lending to the public budget.

He said: "In 2012 the country will need money to finance and refinance its debt, and the cost is very important. I am not optimistic when it comes to the cost of borrowing. The state will not find financing at the expected costs anywhere".

The economic analyst said that the fears that Greece, France and Italy might limit lending to subsidiaries would be somewhat exaggerated.

Aurelian Dochia added: "Just like the Austrians stressed, the Romanian market is very interesting for the foreign banks. With the exception of Greece, which is in a very bad situation, I do not see why Societe Generale would leave a market where it did so well".

The economic analyst said that we shouldn't worry about having capital inflows like in 2008, which led to the subsequent economic imbalances. The concern is tied to capital inflows, because we can't to have them again like in 2008, but we should rely on domestic savings, according to him.

If the parent banks were to indeed decide to stop financing the Romanian subsidiaries, then the costs of lending would increase, as this trend is already becoming evident in Europe.

Last week, the National Bank of Austria issued a series of instructions which condition the lending to subsidiaries on their boosting of refinancing from the local markets, mostly through deposits, as well as through issues on the local market and using funds from supranational institutions such as the European Bank for Reconstruction and Development or the European Bank for Investments.

Thus, subsidiaries which have significant exposure have to make sure that the ratio between loans and local refinancing (the ratio between loans and deposits including local refinancing) should not exceed 110%, which amounts to the possibility of using one Euro to finance a branch if it raises 10 Euros from the local market.

The instructions of the Bank of Austria limit the ability of subsidiaries to develop on the markets of Central and Eastern Europe and will limit their ability to contribute to economic growth, and may probably lead to a lower profitability.

The new approach of the Central Bank of Vienna should lower the risks for Austria, perhaps even at the cost of slowing down economic growth in the region. Over the long term, the impact on the financial systems in the region will be positive, by stabilizing the financing base, but the limitation of lending might hit the countries in Central and South Eastern Europe at a critical stage of vulnerability of the European economy, "Moody's" notes.