Reform in the SEEEs: The Role of the EU Bank of Greece

1. Reform in the SEEEs: the role of the EUBank of Greece – University of Oxford (SEESOX) Conference, Athens, 16 October 2009Peter GrasmannEuropean Commission,Directorate General for Economic and Financial Affairs* * The views expressed in this presentation are exclusively those of the speaker and do not necessarily reflect those of the European Commission 1

2. Overview • Traditional EU support to the region • The crisis and EU-SEE relations • EU policy response to the crisis • Effects / outlook • Remaining agenda • Conclusion 2

3. Traditional EU support to the region • The crisis and EU-SEE relations • EU policy response to the crisis • Effects / outlook • Remaining agenda • Conclusion 3

4. The political geography: • Member States • Candidate countries (at different stages of accession negotiations) • Potential candidate countries 4

5. The traditional modes of support delivery • “Pre-accession anchor”: incentive and guidance for economic and political stabilisation and reform. This becomes more powerful during accession negotiations. • Technical assistance and peer pressure • Financial support: • Regional/structural funds, BOP assistance (MS) • Pre-accession instrument (IPA), macro-financial assistance (MFA) (CC+PCC) • Visa liberalisation 5

6. The Pre-accession instrument Annually around EUR 240 million for HR+MK (candidate countries), and around EUR 500 million for potential candidate countries 6

7. Visa liberalisation • 15 July 2009: European Commission proposes visa free travel for citizens of the former Yugoslav Rep. of Macedonia, Montenegro and Serbia to Schengen countries with new biometric passports. Proposal must be approved by the Council. • The former Yugoslav Republic of Macedonia has met necessary conditions. • Montenegro and Serbia: entry into force of visa waiver depends on fulfilment of all remaining conditions by the date of adoption of the proposal by the Council. 7

8. Visa liberalisation (II) • Albania and Bosnia and Herzegovina: have not yet fulfilled all conditions(pending: fight against organised crime and corruption, weaknesses in the procedure for delivering passports and in border and migration management).If conditions are met, Commission might make a new proposal including these countries by mid-2010. • Residents of Kosovo (UNSCR 1244/99) will not yet benefit from visa liberalisation as technical requirements not yet met. 8

9. Enlargement / accession • Momentum of further enlargement has slowed after the end of 5th wave of enlargement • Decline in popular support • Issue is currently not high on the agenda of Member States 9

10. Enlargement / accession negotiations The former Yugoslav Republic of Macedonia Croatia • Candidate country since 2004 • Negotiations started in 2005 • Some delay due to, now resolved, border dispute with Slovenia • recently reacceleration: On 2 October, 6 further negotiation chapters were opened and 5 closed. • Now 28 chapters are opened and 12 provisionally closed. • Candidate country since 2005, but no start of accession negotiations • Commission proposed on 14 October to start accession negotiations (to be approved by Council) 10

11. Traditional EU support to the region • The crisis and EU-SEE relations • EU policy response to the crisis • Effects / outlook • Remaining agenda • Conclusion 11

12. Sharp contraction in lending, in particular to enterprises … 12

13. Effects on real economy – fast, massive 13

14. Trade spillover 14

15. Bank linkages • Strong build up of foreign positions in South East Europe over the past 5 years • Direct lending and commercial presence as vehicles of foreign banks’ market participation 15

16. Bank linkages (II) • Main drivers: EU banks • Only recently there has been a correction 16

17. SEE and the EU: the contribution of the crisis • The financial and economic crisis has a severe and lasting effect on economic stabilisation in SEE and integration with the EU, unless the crisis is in the EU itself properly addressed. • The crisis was accompanied by a massive slowdown in cross-border economic transactions and momentum for political integration • Crisis resolution, if not done properly, can aggravate this development 17

18. Traditional EU support to the region • The crisis and EU-SEE relations • EU policy response to the crisis • Effects / outlook • Remaining agenda • Conclusion 18

19. IPA –crisis-related ad-hoc measures • July 2009: €100 million budget support for Serbia (first time budget support via IPA) • Two tranches, each EUR 50 million, autumn 2009 and first half 2010 • Conditions for payment: • IMF programme compliance • specific conditions (short-term reform in public finance management, integration with the EU, implementation of laws on competition and state aid control) 19

20. IPA - crisis-related ad-hoc measures (II) • August 2009: € 39 million financial crisis response package for Bosnia and Herzegovina • Support of development of SMEs, investment in infrastructure transport, environment and energy; funding of Deposit Insurance Agency • These EU grants are part of overall Crisis Response Package for the WB that should total €150 million in EU grants and €600 million in IFI loans (i.e. EIB, EBRD, KfW) 20

21. Maintaining orderly bank behaviour • The EU, in close co-operation with major IFIs, tried to secure a continued engagement of major European banks in the countries in the region. • This initiative tried to address a possibly destabilising disorderly rush of foreign banks out of individual countries, in particular programme countries. • For some (i.e. Hungary, Romania, (Latvia) Bosnia and Herzegovina, Serbia) formal discussions led last spring to informal (not legally binding) agreements • Banks to maintain their country exposure as compared to a certain, defined, reference date. 21

22. Maintaining orderly bank behaviour (II) • Problems • Monitoring and enforcement • Deleveraging made impossible? • Knock on effects on other markets? Regional approach? 22

23. Overriding priority: Stabilising the EU economy • Stabilisation of EU financial sector and economy has emerged as main priority, for the EU and the non-members in South East Europe • Main emphasis • Stabilisation and repair of the banking sector • Support to the economy: public spending and structural reform 23

24. EU public support to banks across MS 24

25. Stress testing of banks • EU asked the Committee of European Bank Supervisors (CEBS) to coordinate an EU-wide test of the banking system’s resilience to shocks. • COM and ECB input for economic variables and risk parameters • Test was applied by national supervisors on 22 major cross-border institutions with. • Purpose • Information: consistent and comparable results • Confidence building: overcome negative effects of different and often inaccurate estimates of likely bank exposures • Results were delivered in September and are being assessed 25

26. Monetary support 26

27. Exceptional financial assistance to Member States • 3 Member States particularly hit by crisis (Hungary, Latvia, Romania) • Very high external and public financing needs • Hence, EU balance-of-payments support • Burden sharing with other donors (esp. IMF) • Economic policy conditionality and tranching • Also increase of total amount for EU BoP assistance: EUR 12 billion EUR 25 billion EUR 50 billion 27

28. Supporting the economy • The implementation of the European Economic Recovery Programme is on track. • Projected cumulative 5 percentage points of GDPof overall support to the EU economy in 2009 and 2010 • Stimulus measures are estimated by Commission services to contribute about ¾ of a percentage point to real GDP growth in 2009 and about ⅓ of a percentage point in 2010 28

29. The European Economic Recovery Programme (EERP) • Adopted on (26 Nov 2008) • Monetary and credit conditions with role for central banks, banks, EIB and EBRD • Fiscal policy • should be timely, temporary, targeted and co-ordinated • should mix revenue and expenditure instruments • should be conducted within the Stability and Growth Pact • should be accompanied by structural reforms that support demand and promote resilience 29

30. The EERP (II) • Actions in the four priority areas of the Lisbon Strategy in order to adapt to long-term challenges and to raising potential growth 30

31. Roadmap for regulatory reform EU roadmap for regulatory reform in response to the financial turmoil focuses of 4 key areas: • Transparency (adequacy of disclosure of banks' exposures relating to securitisation and Special Purpose Vehicles) • Valuation standards (valuation of illiquid assets and asset valuation standards used by non-bank investors) • Prudential framework, risk management and supervision • Market functioning (credit rating agencies, securitisation models, non-regulated debt markets and the mis-selling of mortgage credit) 31

32. Regulatory reform: in high gear • Proposals adopted, close to adoption, or in preparation on a wide range of issues • Capital requirements of banks • Defining Tier I and hybrid capital • Solvency requirements • Pay structures and transparency • Cross-border crisis management in banking • Hedge funds • OTC trading • Rating agencies 32

33. Regulatory reform: of particular interest for SEE • Some proposals might have a more direct and tangible impact on banking in SEE • Capital requirements of banks: foreign currency mortgage lending • Cross-border resolution of individual banking crises 33

34. European Systemic Risk Board • Establishment of a new framework for macro-prudential supervision,  a European Systemic Risk Board • It will assess potential threats to financial stability and, where necessary, issue risk warnings and recommendations for action and monitor their implementation. • to be composed of representatives of central banks, supervisors, Commission and EFC, ECB General Council will elect the chair 34

35. European System of Financial Supervisors • Establishment of European System of Financial Supervisors (three new European Supervisory Authorities for banking, insurance and securities markets) • Objectives: • upgrading the quality and consistency of national supervision, • strengthening oversight of cross-border groups through the setting up of supervisory colleges • establishing a European single rule book applicable to all financial institutions in the Single Market 35

36. European System of Financial Supervisors (II) • Binding and proportionate decision-making powers • in respect of whether supervisors are meeting their requirements under a single rule book and relevant EU law, and • in case of disagreement between home and host state supervisors, including within colleges of supervisors. • Supervisory powers as regards credit rating agencies 36

37. Defending a level playing field in EU banking • Commission recognises that crisis justified the granting of aid on the basis of Art. 87(3)(b) EC. • It set out a coherent framework for the provision of public guarantees, recapitalisation measures and impaired asset relief by MS. • Main rationale: • ensure that rescue measures can pursue objectives of financial stability and maintenance of credit flows, • minimising distortions of public interventions between beneficiaries of aid in different MS, beneficiaries with different risk profiles and between beneficiaries and banks without aid 37

38. Traditional EU support to the region • The crisis and EU-SEE relations • EU policy response to the crisis • Effects / outlook • Remaining agenda • Conclusion 38

39. Future of financial intermediation in Europe: market view • Since March strong rebound of financials (+ ~40% total, + ~90% financials) 39

40. Market correction went far • This rebound seems ahead of actual business conditions for banking sector leading to quickly rising P/E ratios 40

41. … with wide dispersion • But large and persisting differences among institutions (and countries) 41

42. Short-term recovery expected • Short-term expectations: modest recovery in sight and largely discounted • Rising demand for lending 42

43. Demand for lending and the economy ECB bank lending survey July 2009 • Similar factors are driving demand for lending to enterprises 43

44. Short-term recovery expected • Confidence indicators back to levels of 1st stage of crisis (summer 2007 - autumn 2008) 44

45. Economic outlook: Commission Spring forecast • Slow recovery for the 2nd half of 2009 and for 2010 • Even in 2010 growth dynamics is expected to remain below pre-crisis levels • EU will trail the US • 2nd quarter was probably better than forecast (for euro area: forecast -0.7%, outturn -0.1% • New forecasts on 19 September (interim) and in November (full-fledged) 45

46. Economic outlook: Commission Spring forecast (II) 46

47. Economic outlook: Commission Spring forecast (III) Demand components: • Mainly recovery of external trade and less sharply falling investment • Government consumption with consistently positive growth 47

48. Prospects: Commission Interim forecast September 2009 • In general confirmation of findings and forecasts of Spring forecast • Some reassessment of individual Member States: • Germany and France stronger than foreseen in spring • Spain, Italy, UK somewhat weaker 48

49. Economic outlook – medium term • Crisis might have a more long-lasting effect on potential growth in the EU • Due to • changes in financial intermediation • Depletion of fixed assets and low investment 49

50. Traditional EU support to the region • The crisis and EU-SEE relations • EU policy response to the crisis • Effects / outlook • Remaining agenda • Conclusion 50