As concerns regarding capital outflows from western banks increase, Eastern European countries may be pressed to utilize existing international support packages, or possibly seek additional help from the IMF.
According to economists Pasquale Diana and Jaroslaw Strzalkowski of Morgan Stanley, countries without any current aid should begin to establish international aid packages in order to “boost confidence enough to ensure that the bear case does not materialize.”
Western European banks control more than three quarters of the banking industry in Eastern Europe, which deepens the region’s risks of a financing gap and credit squeeze from decreasing loan quality and minimal economic growth.
“We look at deleveraging pressures and find that aggressive retrenching, not our base case, by western European banks could leave a funding gap in central and eastern Europe such that most countries except the Czech Republic would probably need to tap existing support packages or negotiate more assistance with the IMF and the European Union,” the economists wrote.
Certain countries are facing a greater challenge than others. Hungary, for example, may require nearly 12 billion euros from the IMF in order to “restore confidence.”
“We continue to think there is no case for a ‘big bang’ withdrawal from the region,” the report continued. “For the banks in particular, we think that the IMF, European Commission involvement in any given country in central eastern Europe would be particularly encouraging.”
