International financial institutions are reviving a crisis-era initiative that sought to reduce the risk of capital flight from eastern European countries as the coronavirus pandemic sparks fears that cross-border banks and investors could start pulling back from vulnerable states.
Institutions including the European Bank for Reconstruction and Development and the IMF are stepping up work within the so-called Vienna Initiative, which played a key role in handling deleveraging by banks during the financial crisis and eurozone sovereign debt meltdown.
The initial focus will be on Western Balkan countries, said Sir Suma Chakrabarti, the president of the EBRD, in an interview with the Financial Times. But the initiative’s renewed activities could range more widely as it seeks to convince commercial lenders to remain committed.
“It is a question of persuading them that they have a real role to play in this crisis and recovery,” he said. “That requires quite a lot of argument and push from all in the situation . . . There is no way we can resolve this crisis and help if we just rely on the multilateral development banks. There is not enough firepower to do that.”
The first Vienna Initiative in 2009, brokered in the Austrian capital by the EBRD, worked to prevent an exodus of cross-border banks from eastern Europe. A second iteration in 2012 attempted to ease deleveraging during the worst of the eurozone debt crisis. This time officials believe the banks are in more robust health after boosting capital and reducing non-performing loans, but they see a need to put in place defences against the possibility that lenders sharply curtail their exposures.
The idea of the Vienna Initiative is for regulators and international financial institutions to bring moral suasion and peer pressure to bear in convincing private sector banks and other investors not to reduce their commitments in vulnerable emerging markets.
Since March the EBRD and its counterparts have been holding meetings to identify cross-border policy issues and assess financing needs related to the coronavirus crisis, including at a gathering of the Vienna Initiative steering committee last week.
Attention is not confined to banks, but could also begin to encompass investors in sovereign debt, in a bid to ensure they stay invested in vulnerable regions. Emerging markets across the world saw the largest ever capital outflow in the first quarter, according to the Institute of International Finance, with much of the movement focused on countries excluding China.
A cluster of countries in the Western Balkans have taken so-called rapid financing instrument credit lines from the IMF — among them Albania, Moldova, and North Macedonia. On April 20 the IMF said Bosnia and Herzegovina had tapped it for €333m to “help the country meet an urgent balance-of-payments need due to the global outbreak of the Covid-19 pandemic”.
The Vienna Initiative encompasses the IMF, EBRD, European Investment Bank and World Bank, as well as European institutions, central banks, regulators and large EU banking groups. It has continued as a regular discussion forum through the past decade, but until recently it has not been conducting active crisis-prevention work.
“It is still a great concern to us in the European neighbourhood particularly, to ensure the financing available in the banking system does get out,” said Sir Suma. “What we are trying to do is push that.”
The EBRD last week decided to dedicate the entirety of its activities to helping the 38 emerging economies it operates in to combat the impact of the crisis. The bank now is ready to provide support of €21bn to fighting the fallout from coronavirus in the 2020-21 period, said Sir Suma. “Our shareholders have recognised that speed is of the essence here,” he said.
Sir Suma is due to step down as president of the EBRD on July 2. An upcoming shareholders meeting next month, which was meant to decide on his successor, has been postponed until the autumn because of coronavirus, however. Asked if he was willing to stay on for an interim period until a successor could be named, Sir Suma said he was not pushing either way.
While he already had plans for life outside the bank, he was willing to “put them aside in the interests of the institution”. He added: “We are in a crisis and therefore the election can’t go ahead right now, so there is an issue of what to do in that interim period.”