January 6 (SeeNews) - Global rating agency Fitch said on Wednesday the events that led to the effective nationalisation of Austria’s Hypo Group Alpe Adria signify the type of event risk that could affect market confidence across central and eastern Europe (CEE) this year.
Austria's actions are equally significant insofar as they ensured that the potential risk of contagion to other banking systems across the region was contained, Fitch said in a statement.
The rating agency said in the statement:
"Fitch believes that a number of market participants will likely reconsider the strategic rationale for their CEE operations in 2010," Michael Steinbarth, Senior Director in Fitch's Financial Institutions team, said.
"While major investors are expected to maintain their operations, with possible minor portfolio adjustments, investors with smaller franchises could potentially re-consider their operations in the region, given the economic challenges and expected constraint in growth dynamics," he said.
Major financial institutions operating in the region, international financial institutions such as the International Monetary Fund, European Bank for Reconstruction and Development, and the European Union, western European governments and central banks have made significant resources and public commitment available to CEE. As such, the perception of risks associated with the region has gradually subsided since peaking in Q4'08 and Q1'09.
However, Fitch highlighted the ongoing challenge of considerable structural problems that are likely to remain for some time and the sensitivity of the region to event risk in a 4 December 2009 report entitled "Banking Systems in Emerging Europe: Structural Problems Remain", available at www.fitchratings.com.
Event risk could take the form of a devaluation of a local currency, a collapse of market confidence with respect to a large international cross-border group, or social/political pressures arising from economic conditions.
Institutional investors and other market participants have questioned whether the Bayerische Landesbank (BayernLB, rated 'A+'/'F1+'/Rating Watch Negative) and other shareholders' 14 December agreement with the Austrian state to effectively nationalise HGAA could trigger a change in the way other banking groups active in CEE provide cross border support.
The events surrounding HGAA again bring into focus the willingness and ability of banking groups operating in the region to support their bank subsidiaries. It is clear from the HGAA case that direct support from parent groups can not always be assumed, particularly from those that are not financially strong.
Furthermore, at some point, western European governments' readiness to support banking groups may reach a limit when the economic consequences of the global crisis require a more stringent fiscal response in 2010 and beyond. In addition, the completion of EC state aid procedures may result in parent banks having to reduce their asset volume, which could include their CEE operations and may alter a parent bank's view on support.
Fitch believes that the likelihood of parent banks letting their CEE subsidiaries fail is remote, provided that the parent banks attach a high level of strategic importance to their operations in CEE, particularly European Union member states.
The risk of support not being provided would rise if the region, and by implication a subsidiary, were to become less strategically important, particularly if the parent were financially weak and were itself being supported by its domestic government. Under this scenario, the Long- and Short-term Issuer Default Ratings (IDRs) and Support Ratings assigned to subsidiaries would reflect the expectation of a weaker level of support.
On 14 December 2009, BayernLB and the remaining shareholders in HGAA agreed with the Austrian state to effectively nationalise HGAA. Accordingly, BayernLB is selling its 67% holding in HGAA to the Republic of Austria for a nominal amount of EUR1, as will the other shareholders. While BayernLB had supported HGAA over the past two years, the German Landesbank decided not to participate in a substantial capital injection which HGAA required because of its asset quality problems.
The decision was partly taken to reduce risks and also due to European Commission (EC) state aid conditions which require BayernLB to substantially reduce its asset base."