As reported here previously, much of the panic surrounding western European exposure to CEE fragility was focused on a particular set of BIS figures, a number amounting to some $1,700bn ‘reflecting total foreign claims’ from the region.
The figure was cited among others by Stephen Jen of Morgan Stanley, but many in the market and the press subsequently misinterpreted or took the number out of context.
Some CEE governments unsurprisingly became a little aggrieved about the subject. On March 4th they issued a statement explaining exactly why they felt the figures were oversimplified and misleading.
Fast forward a week or so later and Barclays Capital is attempting to tackle the subject in its latest research report on the region. And it appears it does all come down to understanding BIS figures. As they explain (our emphasis):
To be more technical, the BIS consolidated banking statistics on banks’ ‘foreign claims’ comprise ‘cross-border claims’ of these banks and also the ‘local claims of foreign affiliates’ in FX and local currency. The widely cited USD1.5trn exposure by Western European banks to Emerging Europe measures the total ‘foreign claims’. However, only about USD588bn of these are cross-border claims (ie, loans Western European banks directly extended to foreign banks, including their affiliates in Emerging Europe).
So, as Barclays Capital says, it is important to understand what constitutes ‘foreign claims’ in the eyes of the BIS. Luckily for us the analysts produce the following graphic to ease us through it:
Given the above, it is only cross-border claims that should really be considered as immediate exposure say Barclays. That’s because the remainder are local claims which are made up of loans extended by local affiliates to local households and corporates. As Barclays highlights:
For example, for the Austrian banks, which have a USD276bn exposure in terms of ‘foreign claims’ (over 70% of Austrian GDP), more than half of these claims are ‘Local claims of foreign affiliates’. The share of such local claims is slightly higher for Swedish banks and is 80% in the case of Italian banks.
What’s more, while the composition of claims does vary from country to country, ‘local claims’ makeup a high proportion of the overall claim number in almost every case. More importantly still, these local claims are in part covered by local deposits (as illustrated in the chart below):
Accordingly:
To the extent that local claims are funded with local deposits, there is no immediate pressure to rollover cross-border loans. Indeed, the maturity of local claims — many of them mortgage loans — is rather long, whereas cross-border lending tends to be short term. Therefore, from the perspective of official support packages by the IMF and the EU, the most immediate concern would be the potential need to partially offset lower roll-over ratios on cross-border claims. Although the BIS does not provide for a separate maturity structure of ‘cross-border’ loans, it can be assumed that such lending mostly has maturities not much beyond 12-24 months.
As for the cross-border figures themselves, non-EU countries like Russia and Turkey represent almost half of the number meaning that out of the total figure of $588bn only about $297bn is applicable to EU member states.
All that said, $297bn is still not a figure to be sniffed at for CEE. As Barclays concludes:
We think that these risks from the cross-country banking exposures — even if at times possibly exaggerated, as we show above — may need to be more transparently addressed by the EU. Until then, the ‘Emerging Europe banking problem’ is likely to remain a key concern for investors in terms of assets in the Eurozone and Emerging Europe.
Related links:
CEE’s stand against SPECTRE-lators - FT Alphaville
CEE’s western exposure – FT Alphaville
Stress-testing Eastern Europe – FT Alphaville