Central Europeans frown at state bank ownership

October 24, 2008

Talk in western Europe of possibly nationalising private banks to save them from the credit crisis is sending shivers down the spine of policymakers in ex-communist central Europe.

They remember how their government controlled financial systems completely collapsed in the 1990s and threatened to take the countries’ economies along with them due to pouring money into firms with little prospect of returning it.

“There are very strong attempts to nationalise banks, which, in my opinion, is a very short sighted approach,” Slovak central bank Vice-Governor Martin Barto told the Reuters Central European Investment Summit in Vienna this week.

He pointed to what he said was “very extensive experience with state owned banks” in Slovakia.

The Slovaks bought non-performing assets from state-controlled banks for over 100 billion Slovak crowns ($4.13 billion), or roughly around 12 percent of GDP, prior to their sale to western investors early this decade.

Polish Deputy Finance Minister was also unimpressed when asked about government ownership. “This is a very delicate issue particularly for countries in our region because 20 years ago banks were not private but public,” she said at the summit.

The central Europeans may shrug off the notion of nationalisation at least for now. Their banks, after being cleaned up and sold, have fed on domestic financial services growth in the past decade and have largely avoided the scraping for profit that forced western banks invest into highly leveraged assets that have turned sour.

But some analysts say attitudes may change fast if another bout of the crisis hurricane sweeps though their markets.

The other measure under fire is guarantees on deposits, both private and on the interbank market. Central Europeans have frowned upon deposit guarantee hikes in some countries as infringing competition. Czech Finance Minister Miroslav Kalousek has opined that European politicians were “going crazy”.

Hungary central bank Deputy Governor Ferenc Karvalits said the European actions to aid euro area markets “have some unintended consequences by creating an uneven playing field for financial institutions in non euro-zone members states”.

First, the ECB’s instruments are not available to non-euro banks and at the same time they thin money markets that those banks need to finance.

Also, guarantees on interbank deposits cut off those not covered from borrowing. And non-euro zone assets cannot be used as collateral in ECB operations, which leads to banks dumping them.

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