Due to increased financial pressure and the debt crisis, banks in the eurozone have become a channel through which problems could spread to the banking sector in Central and Eastern Europe, including Croatia, the Fitch agency said on Wednesday.
Before the current crisis, the foreign ownership of banks was an advantage in the evaluation of the rating of Eastern and Central European countries, but the escalation of the debt problems and a greater need for funding have narrowed the maneuvering space of parent banks in the eurozone regarding the financing of subsidiaries in the Emerging Europe region, the agency says.
Restricted access to funding for subsidiaries in Central and Eastern Europe poses the biggest risk, and in case they need funding, those subsidiaries would be forced to turn to domestic sources of financing.
Fitch singles out Croatia, Bulgaria and Serbia as the countries which have the closest ties with banks from countries on the eurozone periphery due to direct ownership.
According to the agency's data, banks from the eurozone have the biggest ownership stake in the Croatian banking sector, with as much as 48 percent of the country's banking assets held by Italian banks.
Banks from the other four countries on the eurozone periphery do not operate in Croatia, says Fitch.
The other European parent banks operating in Croatia are Austrian banks, with an ownership share in the Croatian banking system of 36.4 percent, French banks with a 6.8 percent share, and Hungarian banks with a 3.3 percent share. Banks from the eurozone together hold a 90.9 percent stake in the Croatian banking system.
Fitch says that a possible channel for the spreading of the crisis from the eurozone are loans pegged to foreign currencies, which despite restrictions are prevalent in Croatia, Hungary, Romania and Bulgaria.
Other risks include the loan to deposit ratio and the persisting high foreign debts.
Fitch warns that its report is based on information provided by the Bank for International Settlements for the first six months of this year. Meanwhile, the debt crisis in the eurozone has escalated and the European Banking Authority has warned banks in the eurozone that they will have to increase their capital adequacy rate to nine percent.
This has forced the banks to collect additional capital and the stricter capital requirements and the growing cost of funding could make it impossible for the banks to finance their subsidiaries in Central and Eastern Europe if such a need arises.
An additional risk is that in such an environment banks in the eurozone could be forced to sell their foreign subsidiaries, as evidenced by the case of Allied Irish Banks that sold its Polish subsidiary to the Spanish bank Santander, Fitch says.
