By Gunter Deuber and Christine Würfel, RBI |

Gunter Deuber, Head of Economics/Fixed Income/FX Research at RBI in Vienna

Some ten years ago, spill overs of the Global Financial Crisis (GFC) to the region Central and Eastern Europe (CEE) became increasingly visible. While the economic slump deepened in Western Europe in late 2008, the first CEE countries had to turn to international assistance (e.g. Hungary). Following market pressure on selected CEE countries, investor concerns about the health of the regional banking sectors increased following a brisk and mostly externally financed credit expansion pre-crisis. Those concerns were also reinforced by the particularly high penetration of local banking markets in Central and South-eastern Europe (CE/SEE) by cross-border operating Western European banks; including major Austrian lenders. Back then, international investors and policymakers were increasingly concerned about the risk of a “cut and run” behaviour. The logic is as follows: every foreign lender to the CE/SEE countries could try to be the first unwinding its exposure to the extent possible (at still decent market prices) in order to shore up capital ratios or to de-risk the balance sheet before others move and would dilute market prices further (a typical prisoners-dilemma constellation).

No swift and disorderly deleveraging in CE/SEE

However, fears about a reckless and disorderly deleveraging in CE/SEE, driven by Western European banks, have not materialized. The so-called “Vienna Initiative (1.0)”, that emerged due to those market concerns (and was officially launched early 2009), played a decisive role here. International lenders, local authorities and International Financial Institutions, finally hammered out a credible package that made the joint commitment of regional private sector lenders to the region – partially in exchange for official sector support as an important signalling device – trustworthy to all participants and the outside world.


Austrian authorities, Austrian CEE banks and other major lenders active in the region had to step into the breach in crisis management in late 2008 and early 2009 because Germany and EU authorities were more concerned with crisis management in Western Europe. Measured against the original objectives, “Vienna Initiative 1.0” was successful. Since 2007/2008 cross-border banking exposures declined modestly in the core CE/SEE countries where major European cross-border banks are operating. Moreover, larger parts of this moderate contraction have not per se been driven by region-specific developments, but several international trends with an impact on the CEE region (e.g. changes in regulatory ratios, international banks revisiting their cross-border business strategies). Furthermore, no substantive banking sector rescue packages were needed in the CE/SEE region.

All in all, deleveraging in the CE/SEE region has been very moderate on aggregate when looking at broader European or global trends in international (cross-border) banking. According to our calculations, consolidated cross-border banking exposures towards CE/SEE have dropped by some 15-20% (compared to initial 2007 levels), while on global and European levels cross-border banking exposures have been cut by 30-50% (cross-border exposures towards some countries hit hard by the euro area crisis were even cut by 70%). However, the moderate exposure cuts on aggregate should not mask that there have been some long-term oriented adjustments with regards to the country/portfolio allocation at leading Western CEE banks over the last few years. This portfolio rebalancing was by and large motivated by de-risking and profitability considerations in order to meet market and/or regulatory demands when it comes to sustainable business models. Moreover, selected CE/SEE countries that were characterised by a too steep rise in financial intermediation levels pre-crisis and high NPL stocks in the aftermath of the GFC needed some years of consolidation (i.e. with financial intermediation ratios on the decline). Furthermore, the need for outright cross-border financing to CE/SEE was also decreasing due to the overall rebalancing in the region (i.e. a rebalancing in terms of current account deficits and funding profiles in the banking sectors).

All in all, modest deleveraging in CE/SEE – where needed – was delivered in a steady and reasonable way, i.e. there was no “cut and run” behaviour. In contrast to the orderly developments in the CE/SEE region – supported by the “Vienna Initiative” framework – developments in Eastern European countries Ukraine or Russia (back in 2008/2009 or since 2014) have shown how a hefty and crisis-induced swift (external) deleveraging might look like. Furthermore, international banking statistics confirm that banking sectors with material importance for the CE/SEE region (Austria, Italy and France) have trimmed their regional exposures in a much softer way than some other Western European banking sectors. On an interesting note, banking sectors with a strong gearing towards the CEE region have also reduced their overall international business activity in a much more substantive way. Overall, the development of the asset base of leading Austrian banks in the CEE region as well as the profitability over the last ten years is also a clear indication, that the “Vienna Initiative” (according to the ideas of the “Vienna Initiative 1.0”) is by and large a success story.

Lessons learned – “Vienna Initiative” a blueprint should a “Paris or Frankfurt Initiative” be needed

The success of the Vienna Initiative is all the more remarkable, as so-called standstill agreements between international creditors/banks have often previously failed. Hopefully this overview will help to ensure that the qualities of this process will find sufficient attention, when policymakers are currently remembering the tenth anniversary of “crisis fighting” within the context of the GFC. Currently, we see that a lot of leaders are very much focussed on the public sector contribution in fighting the GFC globally and in Europe (e.g. at the G-20 level), while the specific cooperation between the private and public sectors in the context of the Vienna Initiative is given less attention. The special cooperation between the public and private sectors within the framework of the “Vienna Initiative” should, of course, not only be sufficiently appreciated historically and in terms of the merits of the actors involved. There are also current and forward-looking references. The “Banking Union” framework will not shield the euro area and/or the EU from any banking sector shakes going forward. However, decent and more centralised information about interlinkages (due to a more central banking sector oversight at the ECB, ESRB) may facilitate crisis management – if needed. Coordinated crisis management inside the euro area/EU, like in the context of the “Vienna Initiative” seen back in 2008/2009 (involving the private and public sector), seems to be a more realistic option nowadays. As part of an imaginary “Paris” or “Frankfurt Initiative” (due to the headquarters of EBA in Paris or ECB in Frankfurt) major euro area/EU banks or other creditors could be offered credible and coordinated stand-still agreements (e.g. for cross-border banking exposures or sovereign bond holdings) in exchange for temporary ECB/OMT support and finally a decent ESM-sponsored stabilisation and reform package – a structure similar to the original “Vienna Initiative” format.

Gunter Deuber is Head of Economics, Fixed Income and FX Research at Raiffeisen Bank International in Vienna.


Watch Christine Würfel, responsible for coordinating Vienna Initiative topics at RBI, explain what exactly the Vienna Initiative is and find out more about its main achievements and future projects:






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