Monday, March 02, 2009

What happens when the legions leave?

In the year 410, the succesful and prosperous Roman colony that was Brittania wrote to the Emperor for military help. Flavius Augustus Honorius wrote back saying sorry but as the Visigoths had just sacked Rome all shore leave was cancelled and the legions were neeeded to protect the city of God. Britain would have to look out for itself.

In a way this is synonymous with what is happening with the banking sector in Eastern Europe. As this perceptive paper from Breughel points out,

the perception has developed in some new member states that solidarity is in short supply when crisis strikes.
A perception that has led to the Hungarian letter. One of the points that the paper makes is that in many eastern countries the banking trade is almost completely dominated by subsidiaries of Western banks.

See table. In the main these eastern subsidiaries have been pretty conservative, unlike their western parents who are all snarled up with toxic debts and what have you. However despite their financial reticence they are being asked by their head offices to retrench and send back the profits etc home. This of course results in the Eastern subsidiaries being hamstrung, and unable to lend as they would like to local individuals and enterprises.

Much as the legions left Britain to defend Rome, money is leaving the east to sort ot the corporate vandals and visigoths at home.

Or as the paper puts it more intelligably,

Asymmetric liquidity and credit management.

In times of stress liquidity management and credit distribution decisions are not only driven by long-term profit maximisation. While western European parent banks did provide continued access to liquidity for subsidiaries, anecdotal evidence suggests that in periods of heightened stress some of them have prioritised hoarding liquidity at home.
Banks may also curtail credit asymmetrically in the future. This could either be a rational response to deteriorating economic conditions in the new member states, or a result of commitments to maintain or increase credit in the home country as a counterpart to public recapitalisation.

Or it could lead to doom for Eastern European econnomies.

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