BSEC BANKING GROUP DISCUSSES FINANCIAL CRISIS

UNCLAS SECTION 01 OF 02 ISTANBUL 000587 SIPDIS SENSITIVE TREASURY FOR INTERNATIONAL AFFAIRS - JROSE/KMATHIESEN USDOC FOR 4200/ITA/MAC/EUR/PDYCK/CRUSNAK E.O. 12958: N/A TAGS: EFIN ECIN SUBJECT: BSEC BANKING GROUP DISCUSSES FINANCIAL CRISIS Sensitive but Unclassified, Please Protect Accordingly. Not for Internet Distribution. ¶1. (SBU) Summary. At the request of the BSEC Council of Ministers, the BSEC Working Group on Banking and Finance met in a special session on November 18 to discuss the effects of the on-going international financial crisis. Representatives from eight of the twelve BSEC member states as well as the Black Sea Trade and Development Bank and the BSEC Business Council made presentations; four members (Albania, Azerbaijan, Moldova and Turkey) were not represented at the meeting. In response to a request from the BSEC Secretary General, econoff made a presentation on the U.S. financial rescue package as well as the results of the G-20 Summit. End Summary. ¶2. (SBU) The October 23 meeting of the BSEC Council of Ministers of Foreign Affairs called for an extraordinary meeting of the BSEC Working Group on Banking and Finance to discuss the global financial crisis. The working group was tasked with assessing vulnerabilities as well as exploring possible regional approaches to ameliorating the effects of the crisis. The working group met in special session at BSEC headquarters in Istanbul on November 18. ¶3. (SBU) BSEC member states include three EU member states (Greece, Bulgaria and Romania) and two G-20 countries (Russia and Turkey) as well as a number of small countries not particularly well-integrated into international financial markets (Armenia, Moldova),so the effects of the crisis as well as government/central bank responses vary considerably from member to member. The following notes were drawn from presentations made by member state representatives. --Armenia: Armenia has not felt much of an effect from the crisis, because it is not well-integrated into international financial markets. However the government and central bank worry that continued problems in the Russian economy could adversely affect Armenia, which relies heavily on remittances to support consumer spending. The central bank is considering lowering the reserve requirement for banks and/or guaranteeing bank deposits if liquidity becomes a problem in the future. --Bulgaria: The banking system, approximately 80% of which is controlled by foreign banks, has been relatively unaffected. The Bulgarian government is focused on transparent fiscal and monetary policy and believes the currency board arrangement (in place since 1997) will assist in maintaining macroeconomic stability. The government is considering contingency measures including: increased guarantees on bank deposits, a buy back system for government securities and lowering the reserve requirement. --Georgia: It is difficult to disaggregate the effects of the Russian invasion in August and the financial crisis, but the central bank representative indicated that the "greater effect was from the war." FDI was severely affected, approximately 13% of all bank deposits were withdrawn in a one-month period, banks stopped lending and consumer spending dried up. In response the central bank loosened monetary policy, lowering interest rates, granting a temporary waiver on reserve requirements and serving as a lender of last resort. Georgia does not guarantee bank deposits. There is sufficient liquidity in the system now, but banks are reluctant to lend. Georgia has a $750 IMF million stand by agreement. --Greece: A representative from the Greek consulate presented a paper on a plan currently under discussion in the Greek parliament to enhance liquidity. The plan involves the voluntary sale by commercial banks of preferred shares to the central government. Banks who chose to issue preferred shares would benefit from government guarantees on new medium- to long-terms loans. The plan also includes a provision for the issuance of special government bonds to finance loans to SMEs as well as housing loans. --Romania: Romania has already felt the effects of the crisis, most notably as a speculative attack on its currency in October which the central bank fended off by injecting liquidity into the foreign exchange market and raising interest rates. Romania is heavily reliant upon the EU for exports, employment and remittances. The government is focused on fiscal prudence and tight budget deficits to maintain macroeconomic stability, but is considering support for the real sector possibly focused on the ISTANBUL 00000587 002 OF 002 construction/infrastructure sectors as well as SMEs. Bulgaria has already increased the government guarantee on bank deposits from 20,000 euros to 50,000 euros and has suspended capital gains taxes for individuals. --Russia: GDP growth is expected to drop in 2009; however, balance of payments as well as international reserves are stable. There has been a significant reduction in consumer demand as well as an outflow of capital from Russia. The G-20 Summit was a very useful initiative and has begun a broad international discussion that will reform the global financial infrastructure. --Serbia: The Serbian consul general explained that financial experts were unable to attend the meeting because they are attempting to reach an agreement with an IMF team in Belgrade this week on a $550 million stand by agreement. The IMF conditioned the agreement on a reduction in public expenditures that could result in a significant increase in unemployment (from 12% to 15%.) The Serbian government has increased the guarantee on bank deposits from 20,000 euros to 50,000 euros. --Ukraine: The crisis led to widespread turmoil in the Ukrainian economy affecting mortgages, commercial real estate and the real sector. The worldwide decline in demand for steel products has been particularly difficult for Ukraine; production in this sector is down 30% and massive lay-offs are expected in the near future. The IMF has approved a $16.4 billion stand by agreement with Ukraine. ¶4. (SBU) In response to a request made by the BSEC Secretary General, DPO made a presentation on the USG response to the crisis and also discussed outcomes of the November 15 G-20 Summit on Financial Markets and the World Economy. She described USG actions to protect the U.S. economy including Treasury's voluntary capital purchase program, the systemic risk exception to the FDIC act and the Commercial Paper Funding Facility, noting that in the midst of market turmoil, the USG's primary focus is recovery and repair. The discussion of G-20 summit outcomes focused on the agreement to implement pro-growth policies, to affirm free market principles, to reject protectionism and to address the needs of the poor as well as the need to improve and coordinate regulatory regimes and to reform international financial institutions. BSEC distributed the summit declaration and action plan to working group participants. The Black Sea Trade and Development Bank representative warned member states to prepare for a sustained (three- to five-year) period of slow growth and a contraction in the real economy. He also voiced concern over IMF agreements that bind BSEC member states to policy prescriptions and fiscal targets that have not changed to accommodate the new global environment. ¶5. (SBU) Comment. The working group meeting was a useful forum for an exchange of information on member state actions in response to the crisis and for a brief overview of G-20 summit outcomes. However, given the vastly different levels of exposure to global financial markets among the member states, not to mention the requirements placed upon the three EU members who belong to BSEC, it is unlikely that the working group will ever be in a position to coordinate a regional response to a financial crisis. End Comment. WIENER