There’s still time to register but if you can’t make it to London you can tune in to watch some events online. To find out when live streams start you can follow us on Twitter and Facebook or visit www.ebrd.com.

Here’s a look ahead to the key themes and issues we’re expecting to focus on.

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The transition region continues to be affected by the fallout from the Eurozone sovereign debt crisis, with capital outflows and parent bank de-leveraging, resulting in credit contraction. This is somewhat mitigated by bank funding from additional deposits, which in turn may stem from a rise in savings since the pre-2008 levels.

• Transition region experienced net capital outflows in Q3 2011 for the first time since 2009 (Chart 1). High frequency data suggests that outflows have continued at least through February 2012, even though at a decreasing pace (Chart 2).
• Parent bank de-leveraging appears to have started in the fall of 2011. Data on bank exposures from the BIS show that assets of international reporting banks in emerging Europe dropped sharply by USD 33 billion in Q3 2011, following a net increase by USD 47 billion in the first half of the year. More recent BoP data show that banks in central and south-eastern Europe continued to lose cross-border funds through Q4 2011 (Chart 3).
• Credit growth has turned negative in almost all of the new EU members by late 2011 and early 2012 (Chart 4). This is consistent with worsening credit conditions in Q3 and Q4 of 2011 in Emerging Europe as a whole (Chart 5).
• At the same time, banks may have avoided an even larger credit contraction due to constrained cross-border funding as they attracted additional deposits in the same period, with some significant exceptions (Latvia, Lithuania, Slovenia – Chart 7). Moreover, the balance of changes in cross-border funding and deposits does not fully explain changes in credit – these were likely driven by banks’ risk aversion in addition to availability of funding.
• Savings rates have risen from their levels seen before the global financial crisis in central and south-eastern Europe (Chart 8). This has likely contributed to the continued accumulation of new deposits in the region’s financial institutions, suggesting that they may continue to at least partially replace the ongoing decrease in cross-border funding.

ECB’s LTRO efforts may have helped the region as sovereign risk declined (Chart 6) for a few transition countries a short while after the first round of support in late December and early January. This is due to lower risk aversion levels in the markets rather than a direct impact since the LTRO funds have not “trickled” into the region.1

[1] Latest ECB data through end of February suggest that bank credit in the Eurozone to the private sector (which could benefit the transition region) declined despite the LTROs, whereas credit to the Eurozone sovereigns rose.

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A few years ago, when the EBRD provided a €115 million loan to Kiev’s municipal transport companies, everybody relished the moment and dreamed of the day when new buses and trolleybuses would hit the roads of the Ukrainian capital. I was personally looking forward to new metro cars to replace the rattletraps I’d been using for a decade on my way to the office.

In late March 2012 the Bank fittingly selected the right moment for this new municipal transport to be revealed: the First Kiev Investment Forum, specially organised to promote private investments in the city. By presenting our successful transport project in the context of the Forum, the EBRD arguably provided the best evidence to show how such investments can work if structured properly.

Municipal projects take time and patience to be implemented and this was no different for the presentation ceremony we organised. It was a typical “four seasons in one day” situation when we had a downpour, hail, snow and bright sunshine within one day. Really not ideal for an open-air event! Luckily for us the skies somewhat cleared up.

Brand new buses and trolleybuses, lined up in Mykhailovska square, attracting the curious attention of Kievites and a few tourists who were braving the weather and exploring the city. The locals would even come and explore the new vehicles in honest disbelief that these comfortable new buses and trolleybuses are now at their disposal. Many of them were keen to find out how they were procured and if they were manufactured in Ukraine or imported.

Many more people will see the new buses and trolleybuses in action, including tens of thousands of fans, who will be coming to Kiev for the EURO 2012 football championship in a few weeks time. Labelled with “Financed by the EBRD” stickers, the new buses, trolleybuses and metro cars will tell them a very positive story of Kiev-EBRD cooperation.

It is difficult to underestimate the importance of the three municipal projects funded by the Bank in Kiev to date and totalling €115 million. The investment should significantly improve efficiency and overall quality of local transport in the rapidly growing city of almost three million residents. Through these projects the EBRD supports environmentally clean and sustainable public transport and offers an alternative to the ever increasing use of private cars.

The Bank is also promoting information technology-based traffic management systems to resolve traffic congestion and bottlenecks along the busiest transport corridors leading into the city centre. With the Bank’s financial assistance, the city of Kiev will improve automated speed control and enforcement, variable message signage, in-pavement traffic sensors, CCTV, rapid emergency response and other dynamic control systems. This will allow the city to manage traffic more effectively, improve air quality through lower congestion levels and improve road safety on some 20 km of the city’s main traffic arteries.

During the First Kiev Investment Forum and later at the presentation, EBRD Ukraine Director André Küüsvek revealed that the city would receive over 200 locally manufactured trolleybuses, 185 buses made in Belarus and 50 new Russian-made metro cars – enough to launch ten new metro trains. Kiev’s Mayor Oleksandr Popov and Head of Kiev Passenger Transport Company Mykola Lambutski appreciated this fact and stressed the importance of the successful work between Ukraine’s largest municipality and the country’s most powerful investor.

A Facebook discussion later that day confirmed a significant public interest to the event. While social media usually provide a platform for various views, the feedback on the event was overwhelmingly positive with general agreement that transport in Kiev will improve thanks to the EBRD’s involvement.

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The financial crisis of 2008-09 has put international banking to the test. Subsidiaries of international banks, now troubled in their home countries, reduced their lending earlier and faster during the crisis when compared with domestic banks (De Haas and Van Lelyveld, 2011). Yet, in countries where foreign banks had a leading position they often continued to be stable credit sources (Claessens and Van Horen (2012). One region where foreign banks dominate the financial landscape is Emerging Europe (Figure 1) and this blog analyzes bank lending behavior in this part of the world during the crisis. We pay special attention to the impact of the Vienna Initiative, a public-private partnership that was established towards the end of 2008 to safeguard financial stability in emerging Europe.

Figure 1: Foreign banks around the world

(click image to view large version)

At the height of the 2008-09 crisis, it became increasingly uncertain whether foreign banks would continue to fund eastern European customers through their local subsidiaries. The fear was that while it would be in the collective interest of banks to roll-over debt to Emerging Europe, the absence of a coordination mechanism could lead individual banks to withdraw, ultimately causing a ‘run’ on the region. The accompanying decline or reversal in financial flows would not only have had dire consequences for local firms and households but also have led to large exchange-rate fluctuations and balance of payments problems.

These concerns were exacerbated when some Western governments started to financially support banks towards the end of 2008. This alleviated concerns about a credit crunch ‘at home’ but did not reduce worries about a retrenchment of multinational banks from Emerging Europe. On the contrary, concerns were raised that government support came with ‘strings attached’ and that banks were asked to focus on domestic lending.

What was the Vienna Initiative?

In November 2008, a number of banks with a large presence in emerging Europe sent a letter to the European Commission to call for a quick and coordinated response to the problems in Emerging Europe and, more specifically, to ensure sufficient funding for banks operating in the region. In response the Vienna Initiative (VI) was created as a coordination platform for multinational banks, their home and host country supervisors, fiscal authorities, the IMF, and development institutions to safeguard a continued commitment of parent banks to their subsidiaries and to guarantee macroeconomic stability in emerging Europe.

In February 2009, the European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), and the World Bank Group launched, within the context of the VI, a ‘Joint IFI Action Plan in support of banking systems and lending to the real economy in Central and Eastern Europe’ with the objective “to support banking sector stability and lending to the real economy in crisis-hit Central and Eastern Europe”. During Spring 2009, these institutions met several times with 17 banking groups and a ‘joint needs assessment’ resulted in financial support packages for these banks.

This support was integrated with IMF and European Union macro-financial support programs to Bosnia and Herzegovina, Hungary, Latvia, Serbia, and Romania. In return for these countries’ commitment to keep their programs on track and for financial support, various multinational banks signed country-specific commitment letters in which they pledged to maintain cross-border exposures and to continue to provide credit to firms and households. Banks confirmed that they would keep subsidiaries adequately capitalized and sufficiently liquid.

At the time concerns were expressed that the focus of these commitment letters on five countries could tempt multinational banks to support these countries by withdrawing funds from countries without exposure commitments (such as Poland and the Czech Republic). Such negative spillovers could even have contributed to the cross-border transmission of the crisis.

Did it work?

Although a large-scale, uncoordinated withdrawal of banks from Emerging Europe did not materialize––and the VI can therefore be considered successful stricto sensu––virtually no empirical evidence is available on its impact. In a recent working paper (De Haas, Korniyenko, Loukoianova, and Pivovarsky, 2012) we provide some such evidence, based on  a comprehensive bank-level dataset. Our findings are as follows:

1. In 2008, before the VI was initiated, bank lending dropped significantly more in (future) VI countries compared to non-VI countries. On average, the adjustment in credit growth was about 14 percentage points sharper in the five countries that would need to be supported by the IMF and EU a year later. In 2009 – when the credit crunch intensified on average – VI countries ‘normalized’ and the credit decline became more in line with other countries in the region.

2. During 2008, foreign banks were the first to curb credit growth, bringing it back in line with that of private domestic banks. Domestic bank lending mainly slowed down in 2009.

3. In a panel-data analysis we show that credit growth of foreign banks that were part of the VI was about 10 percentage points higher in 2009 compared to other banks (all else equal). In a cross-sectional analysis we confirm a positive relationship between parent banks signing a commitment letter in a specific country and credit growth of their subsidiary in that country in 2009. We do not find a separate impact of government support on the growth of bank lending.

4. When a parent bank did not sign a commitment letter in a particular country but did do so in another country, we do not find any negative impact on lending in the non-signing country. It is therefore unlikely that VI banks propped up their lending in VI countries, as per the signed commitment letters, by reducing their lending elsewhere in Emerging Europe. If anything, we find a positive spillover effect.

Overall, our evidence suggests that participation in the Vienna Initiative may have helped banks to stabilize their lending. Importantly, we find no evidence of negative spill-overs to other parts of emerging Europe. Complementing public funds by a coordinated bail-in of private-sector lenders may not only have helped countries to close external funding gaps, but also to soften the inevitable deleveraging process in emerging Europe and to prevent a uncoordinated ‘rush to the exit’.

Vienna 2.0

The ad hoc nature of the Vienna Initiative reflected that international coordination mechanisms as they had existed before the 2008-09 crisis turned out to be insufficient during the crisis. While subsequent improvements have been made, the recent eurozone debt crisis has shown that policy coordination between home and host-country regulators and supervisors still leaves to be desired. When exposures to sovereign risk in the Eurozone periphery brought about a deleveraging process as of Summer 2011, the need was felt to once more step up the coordination between banks and their home and host-country supervisors. This initiative was dubbed Vienna 2.0.

As part of Vienna 2.0, principles to avoid disorderly deleveraging in emerging Europe were agreed by officials and private sector banks in Brussels in March 2012. The agreement aims to achieve better (ex ante) coordination between banking sector regulation and supervision and to contain negative spill-overs between the euro area and emerging Europe. Such improved coordination and information-exchange is not only necessary to prevent spillovers of financial shocks, but also because the alternative –forcing highly integrated pan-European banking groups to hold significantly more capital and liquidity in each and every individual subsidiary– could turn out to be very costly.

References

Claessens, S. and N. Van Horen (2012), “Foreign Banks: Trends, Impact and Financial Stability”, International Monetary Fund Working Paper 12/10

De Haas, R., Y. Korniyenko, E. Loukoianova, and A. Pivovarsky (2012), “Foreign banks and the Vienna Initiative: turning sinners into saints”, EBRD Working Paper No. 143, London.

De Haas, R. and I. Van Lelyveld (2011), “Multinational Banks and the Global Financial Crisis: Weathering the Perfect Storm”, EBRD Working Paper No. 135, European Bank for Reconstruction and Development, London.

Note: Foreign-bank assets as a % of total banking assets (Source: Claessens and Van Horen (2012); EBRD).

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Hungary, for instance, has experienced a contraction in corporate lending by about 1.6 per cent of GDP over the past year, and surveys of credit conditions indicate a continued reluctance of credit officers to extend fresh funds.

Apart from external factors within the eurozone, capricious regulation and government-sponsored restructuring schemes, coupled with macroeconomic and financial market volatility have undermined risk appetite within the banking sector.

Against this backdrop, in mid February the Hungarian National Bank announced new facilities to support bank lending.

Key elements include a broader collateral eligibility for central bank loans, a preferential 2-year lending facility and a proposal to allow universal banks to issue mortgage bonds with support from a central bank mortgage bond purchase programme.

Against the experience in other transition countries, do these measures stand a chance to reverse the credit crunch in Hungary?

The Hungarian National Bank’s premise seems to be that problems in the supply of bank credit are at the root of the credit contraction.

• This could be due to credit rationing, where banks are unable to distinguish riskier borrowers from less risky ones and hence restrain lending overall. Here, a common approach is for the government to take on part of credit risk. Guarantee programmes taking over a part of the credit risk from the banks (especially aimed at the SME sector) are usually provided by specialised (often state-owned) institutions. This has been tried byHungary’s State Development Bank for some time, largely without success.

• A second supply problem could lie in poor funding conditions for banks, and this is what the Hungarian National Bank’s measures are largely aimed at. Recapitalisation or funding from governments and central banks have been prevalent in many countries since the crisis, partly aimed at sustaining or reviving lending.1

These measures were sometimes accompanied by explicit lending targets, usually with limited success. This seems to be the case for the UK’s Project Merlin or the SME lending targets under the capital and funding support programme in Hungary.

A more interventionist form of lending targets used by several Early Transition Countries (ETCs) such as Kyrgyz Republic and Tajikistan is more explicitly directed lending, supporting a particular sector or specific companies.

This type of lending can have significant distortive effect as banks can be coerced to lend for projects or entities that are not viable, resulting in increased non-performing loans (NPLs) later.3

The new Hungarian measures make a fresh attempt to revive the funding of banks.

A two-year variable-rate collateralised lending facility provides funds at a rate below the rate of overnight borrowing from the central bank but above the cost of overnight inter-bank funding.

The facility is somewhat similar to the European Central Bank’s 3-year long-term refinancing operations (LTROs) which have had a total take-up of over EUR1 trillion (see our news story above).

The success of the Hungarian facility on government bond yields or lending will depend on the re-pricing period (longer periods in general would help) and other factors such as expectations on the interest rate path.

The central bank also recommended changes in legislation to allow universal banks issue covered bonds, which currently only specialised mortgage banks can do.

This could allow the banks to utilise their substantial mortgage loan portfolio (estimated at between EUR3 and 5 billion) to obtain long term funding. Covered bond issuance would be supported by a purchase programme.

Benefits of such expansion in the right of covered bond issue could be significant:

• Narrowing the banking system’s typical maturity gap;
• Providing new collateral for central bank repo facilities for banks that would purchase the mortgage bonds issued by other banks that would provide funds for lending;
• Securing external funding as parent banks acquire such assets withinHungary. Indeed several major parent bank subsidiaries have expressed interest in covered bonds;
• Helping revive and develop the local covered bond market. Hungarian mortgage banks issued a substantial amount of mortgage bonds (the stock is around 5% ofGDP) due to an earlier subsidy scheme but the secondary market has remained illiquid.

Despite these potential benefits, the market will likely remain small and quite illiquid due to the limited number of potential institutional investors.

In particular, the recent de facto nationalisation of the funded pension system has undermined an important investor base, hampering market development. The medium-term potential for Hungarian forint issues is limited as most of the existing loan stock is in Swiss francs and medium term mortgage lending prospects are limited due to weak income trends in the Hungarian household sector.

However, supporting the funding of Hungarian banks seems to address only a smaller part of the problem.

Banks will continue to be reluctant to lend due to the uncertain regulatory environment and weak growth prospects. An IMF-EU programme strengthening confidence in Hungary’s economy remains under consideration – though negotiations are yet to commence – and would improve funding conditions for banks by reducing regulatory uncertainty and initiating growth enhancing structural reforms.

1 The most notable recent example is the ECB’s LTRO (long-term refinancing options).

2 NPLs have tripled in the Kyrgyz Republic (up to 15.8% in 2010 from 5.3% in 2008) and peaked at 13.5% in June 2010 up from 5.4% in 2008 in Tajikistan. Several banks had to go to administration as a result.

3 NPLs have tripled in the Kyrgyz Republic (up to 15.8% in 2010 from 5.3% in 2008) and peaked at 13.5% in June 2010 up from 5.4% in 2008 in Tajikistan. Several banks had to go to administration as a result.

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Credit growth in these countries also appears to have markedly weakened, though countries with stronger domestic growth appear more insulated from adverse external funding developments, not least due to growth in the local deposit base.

As European banks continue to restrain their asset growth, a second ‘credit crunch’ has emerged as real risk in recent months in the eurozone [1].

A survey on lending conditions conducted by the Export and Credit Bank (ECB) up to early January found that respondents indicating a tightening in lending conditions for the corporate sector have more than doubled  - to 35 per cent –  since October 2011 (see Chart 1).

By this measure, lending “tightness” is back up to its level in mid-July 2009. In mid December the ECB undertook a bold three year refinancing operation, demand for which strongly exceeded expectations (523 banks obtained €489 billion), and a second such operation is planned for later this month.

These refinancing operations were only partly reflected in this survey, though in the view of ECB President Draghi they have indeed averted a major credit crunch.

ECB data also shows that loans to the private sector have slowed further, to a mere 1 per cent in December (one a year earlier); an unexpectedly sharp slowdown to the slowest pace in 18 months. Constraints in bank funding conditions are bound to have led to a marked deceleration since September (Chart 2).

The question is to what extent these sharply tighter lending conditions have by now spilled over to emerging Europe. The October EU summit – which mandated the 9 per cent capital ratio target – ruled out “excessive” deleveraging in other EU member states. [2]

Colleges of supervisors covering all subsidiary operations of European bank groups will review the recapitalisation efforts, which are to be concluded by the middle of this year. Such spillovers are conceivable through at least three channels.

• Reduced direct cross-border lending of EU-based banks.
• Reduced funding of banks in the region, particularly in the form of reduced parent bank funding, but also through scarcer or more expensive wholesale funding.
• Expectations of an economic slowdown, which for given funding could affect both credit supply and credit demand.

Below, we examine these linkages based on a number of recent data releases. In sum, we find deteriorating conditions for external funding for banking systems in the CEB and SEE regions.

We point to the sharply tighter lending conditions of eurozone based banks, and also of banks within the central Europe region. The dynamic of credit within our countries also appears to have markedly deteriorated, though countries with stronger domestic growth such as Poland appear more insulated from adverse external funding, not least due to growth in the local deposit base.

Capital flow data. The balance of payments data for the eurozone (category ‘other investment’ covering largely bank-related transactions) show a capital outflow of about 200 bn in the first half of 2011, though a partial re-flow of bank funding into the currency zone of about €32 billion in the five months to November.

The latter was mirrored in central Europe where balance of payments data show substantial capital outflows in several countries over recent months (Chart 3).

Hungary’s balance in bank related capital flows turned negative in mid-2010, a trend that accelerated last year.

Poland showed a net outflow of about 2 per cent of GDP between July and November last year, aggravating the effects on the zloty already felt through the outflows from the domestic bond market.

Data on bank exposures from the Bank for International Settlements (BIS), a key source for tracking changing bank funding patterns, [4] shows that assets of international reporting banks in relation to emerging Europe dropped sharply by $33 billion in Q3 2011, following a net increase by $47 billion in the first half of the year.

These reductions in exposures were concentrated in Poland (minus $12 billion) and Turkey ($8.8 billion), each of which had still seen significant inflows in the first half of the year.

In Hungary roughly stable exposures of international banks towards the country in the first half of the year were reduced sharply by about 8 per cent in the third quarter, when serious concerns over stability in financial regulation emerged in the country. Chart 4a shows these developments across a number of key regions relative to existing bank exposures.

In a longer term perspective for emerging Europe in total (though excluding the very volatile data for Russia and Turkey), BIS data shows a continued reduction in exposures since they reached a peak in mid-2008 (Chart 4b).

At the same time the pace of this deleveraging is still slower than what was observed in the wake of the Asia crisis that began in 1997 (chart 4c), where lending between unaffiliated parties led to a much less stable dynamic.

Credit Conditions. These developments are beginning to spill-over into credit markets within the CEB and SEE regions.

We reported last week on a survey of credit conditions compiled by the Institute of International Finance (IIF) that compared the EBRD region to other emerging market regions, based on responses by eight member banks (Chart 5).

While global banking conditions had weakened and international funding conditions have tightened substantially over the past three months in all emerging markets, emerging Europe stood out for the worst deterioration, in particular with regard to funding conditions.

These developments are similarly reflected in national surveys compiled by the central banks of Poland and Hungary.

Actual trends in credit will lag behind the indications given by credit officers in surveys of lending conditions. As Chart 6 illustrates, among countries in the central Europe region deleveraging is far from universal.

Banking systems with balanced funding structures and domestic growth that underpin deposit growth, such as in Poland or the Slovak Republic,  continued to show modest credit growth, including in the final months of the year.

Others – here Lithuania and Hungary with traditionally high loan to deposit ratios – showed a continued decline. [3]

However, overall credit growth moderated towards the end of the year, and where contractions occurred they were worse in the second half of the year. 

Charts

Chart 1. Net percentage of EZ banks reporting tighter standards in loan approvals. Source: ECB

Chart 2. Eurozone: credit to the private sector, year on year per cent change. Source: ECB

Chart 3. Bank-related capital flows. Source: CEIC

Chart 4a. Reductions in bank exposures in relation to selected EBRD regions (per cent change over previous quarter)

Chart 4b. International bank exposures to emerging market regions. Source: BIS

Chart 4c. Variation in international bank exposures from peak in emerging Europe (June 08=0) and in four Asian countries (June 97=0)

Chart 5. Lending conditions in emerging Europe. Source: IIF

Chart 6. Trends in credit. Source: CEIC; estimated valuation adjustment applied for Hungary and Poland to correct for exchange rate fluctuations.

[1] In line with a recent Morgan Stanley commentary we generally refer to a ‘credit crunch’ as “a reduction in the availability of credit that is abnormally large for a given stage of the business cycle and the profitability of investment projects – due to balance-sheet constraints of the banking sector. In these circumstances, credit becomes less available regardless of the price that borrowers are willing to pay.”

[2] From the Euro summit communiqué: “National supervisory authorities, under the auspices of the EBA, must ensure that banks’ plans to strengthen capital do not lead to excessive deleveraging, including maintaining the credit flow to the real economy and taking into account current exposure levels of the group including their subsidiaries in all Member States, cognisant of the need to avoid undue pressure on credit extension in host countries or on sovereign debt markets.”, p. 15.

[3] These data include cross-border lending by banks, but also lending to bank subsidiaries. They normally represent a more accurate, though less timely reading of bank exposures than would be available in national balance of payments capital flow data or in the international investor position of the recipient country.

[4] In Hungary, a pre-payment scheme for mortgages that was in effect in the second half of the year aggravated previously observed trends in credit growth.

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In this post we take a look back at developments in trade finance in 2011, and examine the outlook for 2012, with a particular focus on the strong role of the EBRD’s Trade Finance Programme in this area.

First half of 2011: still in recovery mode

The strong recovery of global trade finance volumes continued through the first half of 2011. The financial crises of 2008-09 had led to a sharp reduction in world trade and trade finance.

Around mid-2010 trade finance volumes in EBRD countries of operation started recovering and this upward trend continued into the first half of 2011.

The positive sentiment in trade finance was supported by robust economic growth in emerging markets, particularly outside Europe, as well as rising commodity prices.

Commodity exporters, such as Kazakhstan, Mongolia and Russia, saw increases in trade flows and also in some cases significant increases in capital inflows (with Russia being a notable exception).

More broadly, increased consumer confidence in the region led to an increase in domestic demand for consumer goods and an associated increase in imports.

This trend was observed in the CIS (Figure 1) as well as in most CEB, SEE and SEMED countries, with a particularly strong growth of exports and imports in the Baltics. Croatia, where both exports and imports continued contracting, has been a notable exception (Figure 2).

Intra-regional trade received an additional boost as in July 2011 Belarus, Kazakhstan, and Russia removed all internal customs borders within their Customs Union.

The Kyrgyz Republic and Tajikistan are currently also considering membership in the union, potentially further expanding its territory. Russia’s international trade is expected to be further facilitated by Russia’s upcoming WTO accession, the terms of which were approved on16 December 2011 (see figures 1 and 2).

Figure 1. Key Trade Flows in the CIS in Jan-Sep 2011

Figure 2. Exports and Imports in Selected Countries, Jan-Sep 2011

On the other hand, Belarus faced a more difficult environment for international trade finance.

Under the ongoing economic crisis, the authorities temporarily introduced multiple exchange rates. In the worsening economic and political situation most foreign commercial banks, export credit agencies and insurance underwriters decided to close their lines for Belarus, which made it increasingly difficult for local exporters and importers to conduct their international business.

Despite a significant increase in trade finance volumes, access to trade finance remained restricted for Kazakhstan and Ukraine in 2011.

Banking systems in these countries remained burdened with high non-performing loans ratios and local banks have been reluctant to take on new business, while limits provided by foreign commercial banks, export credit agencies and insurance underwriters remained limited due to the perceived high risk of doing business with local counterparties.

Later in 2011: A marked slowdown

In the second half of 2011 the turmoil in the eurozone area started to dampen confidence, which also impacted negatively trade finance. Fears surfaced that the recent recovery in trade finance might have been short-lived and that at least part of the world could re-live the trade contractions of 2008/9.

It is challenging to assess developments in real time, as timely and systematic data on trade finance are scarce. One measure that captures a blend of trade and trade finance developments is the number of SWIFT (Society for Worldwide Interbank Financial Telecommunication) payment system messages explicitly related to trade, such as collection and cash letters, documentary credit and guarantees, which account on average for about one per cent of all SWIFT messages.

This indicator dropped sharply in late 2008-early 2009 and rebounded strongly in the first half of 2010 (Figure 3).

Since April 2011 it has then dropped again into negative territory. This parallel would indeed support the gloomier view on trade finance. In contrast, the total number of SWIFT payment messages has been rising fast since early 2010, reflecting perhaps globalisation and technology trends ( see figure 3).

Figure 3. Growth in Number of Trade-Related SWIFT Messages

2012: A bleak outlook 

The market outlook for trade finance in 2012 is generally gloomy. The crisis in the eurozone is taking its toll on Western banks, leading to more binding financial constraints, and is likely to reduce the availability of trade finance further.

Banks in central and eastern Europein particular will have to deal with reduced trade finance limits. Banks in countries which already had difficulties receiving sufficient lines before the latest financial turmoil are unlikely to receive new limits or limit increases for their trade finance business.

The latest ICC-IMF survey of almost 500 financial institutions worldwide confirms a bleak picture for trade finance in 2012.

Unsurprisingly, while the outlook forAsiais still relatively strong, the outlook for the euro area is particularly weak. Almost 59 per cent of respondents in Emerging Asia expect trade finance conditions to improve in 2012, while in the eurozone only 16 per cent do, and almost half of respondents there expect things to get worse.

Central and eastern Europe has the second highest number of pessimists, of 28 per cent (Figure 4).

This pattern creates a bigger problem for global trade than first meets the eye. According to the survey, as much as half of trade finance products offered by banks worldwide (ICC and IMF Market Snapshot January 2012, conducted in the second half of December 2011) come from euro area banks. The latter’s increased constraints can therefore have a negative impact globally on trade finance (please see figure 3).

Figure 4. Trade finance lack-of-confidence indicator

Indeed, the main factor in the negative outlook is reduced availability of credit at counterparty banks.

This factor was singled out as a major risk by 42 per cent of respondents. Many respondents were also concerned about potentially shrinking demand for trade finance, both as a result of lower trade volumes (28 per cent of the respondents) and a move to cash in advance transactions (18 per cent, Figure 5).

Figure 5. Factors affecting negatively the outlook for trade finance

The EBRD’s contribution to support trade

The majority of the participants of the survey recognized that measures by IFIs helped their banks with continued provision of trade finance products. Trade facilitation programmes of different IFIs, including the EBRD, are expected to continue to play a significant role in overcoming shortages of liquidity in the commercial trade finance market.

The EBRD’s Trade Facilitation Programme (TFP) is expected to remain in high demand in 2012.

The programme, launched in 1999, can guarantee any genuine trade transaction to, from and within EBRD countries of operation. The Programme’s participants currently include 101 issuing banks in 21 countries of operations with limits exceeding €2 billion in total, as well as more than 800 confirming banks throughout the world.

Since 1999 the TFP has facilitated more than 11,600 cross-border trade transactions in the total amount of €7 billion.

In 2011, the TFP supported a record 1,616 transactions for a total amount of €1.03 billion. The programme was particularly active in our early transition countries (ETC), which accounted for 60 per cent of all recorded transactions in 2011. Banks in these countries will remain the key beneficiaries of the programme.

Importantly, the programme also provides the necessary transfer of the latest know-how in trade finance. The TFP continues to offer to staff of active issuing banks up-to-date technical assistance and training which reflects the latest trends in the trade finance industry.

The newly introduced TFP e-Learning Programme is particularly popular among the professional trade finance staff, as it allows them to study on-line whenever they have time and keeps them up-to-date with the latest developments in trade finance as additional courses are being added to the online training on a regular basis.

In the new region, the EBRD is looking to deploy trade finance as well. Due to increased political risk in southern and eastern Mediterranean (SEMED) countries, many foreign commercial banks have reduced their trade finance facilities for banks in the region and restricted financing to smaller, short-term trade transactions.

As a result, there is now a substantial demand for risk cover and financing under the EBRD’s Trade Finance Programme, particularly for the import of machinery and equipment, foodstuff, spare parts, construction material and agricultural inputs such as fertilizers and crop protection chemicals.

In addition, banks in the SEMED region have stated their interest in the TFP’s training courses such as the e-Learning Programme and the TFP advisory services for both specialized bank staff and staff of their major importing and exporting clients.

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The global market for syndicated loans displayed a very different pattern during the first half of 2011 compared to the second half of the year, reflecting the marked turnabout in market conditions in the middle of the year.

The first six months were characterised by rising volumes and falling spreads. This was not only the case in the EBRD region but reflected a global, upward trend that started when lending had bottomed out towards the end of 2009 (in the wake of the Lehman Brothers collapse a year earlier). See Chart 1 below.

In this period, pricing continued to decline for investment-grade credits, particularly in France, Switzerland and Germany. Indeed, many of the deals –despite spreads that were considerably below banks’ funding costs– ended up being oversubscribed.

This attractiveness of tightly-priced and high quality credits should be seen in the light of the (mirage of?) spin-off business as well as the hope that increased USD funding costs would be a temporary affair and that – in time – these loans would be profitable.

Refinancing continued to be significant (49 per cent of total lending volumes in 2011). Much of this refinancing was by high-quality borrowers that took advantage of a (still) favourable environment for good credits. Borrowers tried to lock in low spreads and long tenors in anticipation of a closing market, as the eurozone crisis had already started to deepen.

Yet, this environment of high volumes and low spreads reversed quickly during the second half of 2011. The game-changer was the realisation by banks that the European sovereign debt crisis was not going to pass them by but, instead, had – and still has – the potential to damage their balance sheets badly.

Together with the Basel III capital and liquidity requirements – in some cases being brought forward by national regulators – and market pressures in the same direction, this caused loan volumes to fall in the 2nd half of 2011.

By the beginning of Q4, a number of banks were effectively “closed for business” in many countries and sectors. Q4 loan volumes recorded a 15 per cent decline compared to Q3 and dropped 16 percent when compared to the last quarter of 2010.

Banks began to resist even blue chip clients’ demands for lower pricing. By July it had become clear that tight spreads on loans, even for top names, would not continue. With national (and therefore bank) ratings downgrades and potential defaults looming, many banks announced openly that they would focus on core markets and clients, making withdrawals from whole countries in the region. Other banks did not announce it, but it became apparent from their behaviour that they would also refocus.1

Syndicated lending in 2012?

The loan market in Emerging Europe and the SEMED region has suffered considerably during 2011, blighted by the on-going eurozone debt crisis and market volatility resulting from political and economic unrest in North Africa and the Middle East. The current regulatory environment is also adding to the banking industry’s difficulties as the cost of capital continues to be an issue which banks need to address.

An econometric analysis of the decline in syndicated cross-border lending after the Lehman Brothers collapse indicates that such capital and funding constraints indeed have a strong impact on syndicated lending flows.2

In particular, international banks that had to write down sub-prime assets, refinance large amounts of long-term debt in an illiquid market, and experienced sharp declines in their market-to-book ratio, transmitted these shocks across borders by reducing their syndicated lending. These banks restricted their lending especially to mid-tier corporate borrowers (typically with no or lower credit ratings).

These results do not bode well for firms that depend on cross-border lending from Western European banking groups. The 2007-09 crisis merged almost seamlessly into the 2010-12 Eurozone crisis and the funding constraints that were central to the previous crisis are at the core of the current crisis too. Large and unexpected write-downs now stem from exposures to sovereign risk in the Eurozone periphery.

In addition, banks are once more experiencing difficulties in rolling over maturing bonds. This suggest that both types of balance-sheet shocks will translate into substantial reductions in cross-border lending, hurting smaller companies with few alternative funding options in particular. Indeed, recent data indicate that while average pricing continued to fall for better credits in 2011, it rose sharply for weaker credits in the final quarter.

Whilst much will hinge on the outcome of the Greek debt discussions, it is clear that the loan market will continue to be a difficult one in 2012, if only because of Basel III compliance requirements. These demands will drive banks towards shorter tenors, stronger structures, and higher spreads to compensate where the capital allocation is otherwise unattractive.

Banks will also continue to focus on core countries and clients, which will make it hard for borrowers outside these core markets. While we have seen Russian banks begin to step into Ukraine and Kazakhstan, it is doubtful whether they can or want to substitute for the exodus of western banks from such markets.

Chinese and Gulf banks (UAE, Qatar, Kuwait) have in principle the potential to be a strong source of USD funding, but have thus far not regarded corporate lending in the EBRD region as a core market. The causes for this are varied. Chinese banks tend to support projects with a Chinese national benefit and neither group of banks is ready to support small transactions for mid-tier corporates in a country where they do not have an active presence.

As a result, the lack of credit appetite and the tightening of credit policies will mean that pricing will continue its upward trajectory in the remainder of this year.

1 Despite liquidity and funding constraints, some deals were closed in western Europe at pricing levels which appeared to defy the market. For instance, Nestle closed a 364-day EUR 4.5 bn standby facility at a margin of just 10bp, the lowest level seen in 2011. It could command such low pricing due to its extensive network of relationship banks and a rating which tops that of some European sovereigns.
2 Ralph De Haas and Neeltje Van Horen (2012), International Shock Transmission after the Lehman Brothers Collapse: Evidence from Syndicated Lending, American Economic Review, May, forthcoming.

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