(Recasts with S&P comment, updates prices)
By Boris Groendahl
VIENNA, Feb 17 (Reuters) - Two leading ratings agencies said
on Tuesday the ratings of emerging European banks and their west
European bank owners could suffer as recession bites, and the
warnings caused a sell-off in European stocks and currencies.
Moody's Investors Service released a report overnight saying
banks in eastern Europe with large loan books faced downgrades
and their parent banks' ratings could also weaken.
Standard & Poor's said in an interview with Reuters that the
growing difficulties faced by Western banks in supplying funding
to their subsidiaries in emerging Europe could prompt an overall
ratings view for the region's banks.
The ratings agencies reminded investors of the crucial role
a handful of Western banks has in keeping the former Communist
bloc afloat after bankrolling its rampant growth in the boom
years of 2005 to 2007.
The comments triggered sell-offs in financial stocks exposed
to the region, drove the euro <EUR=> to two-month lows against
the dollar and sent the currencies of Poland, the Czech
Republic, Romania and Hungary to multi-year lows.
"There is no doubt that markets have decided that emerging
Europe is the subprime of Europe and now everybody is running
for the door," said Lars Christensen, head of emerging markets
research at Danske Bank in Copenhagen.
Moody's said the recession in emerging Europe will be more
severe than elsewhere due to large imbalances, and will put the
financial strength ratings of local banks and their western
parents under pressure.
Western banks led by UniCredit <CRDI.MI>, Erste Group Bank
<ERST.VI>, Raiffeisen International <RIBH.VI> and Societe
Generale <SOGN.PA> have bought most of emerging Europe's banking
sector in past years to tap into rampant credit growth.
Banks' eastern franchises have in the past boosted parents'
profits and helped them resist the temptation of structured debt
products, but this boon has turned into risk now that economic
crisis has the region firmly in its grasp.
"A widespread deterioration in the economic health of core
markets in Eastern Europe is exerting negative rating pressure
on subsidiaries and eventually may also lead to a weakening of
the parent bank's ratings," Moody's said.
S&P analyst John Gibling said banks in eastern and central
Europe were becoming more dependent on funding from their
western European parents at a time when capital-raising was
hampered by the financial crisis.
"We may have to review some of the bank ratings as the
situation becomes bleaker," he said.
CURRENCIES, STOCKS FALL, SPREADS SOAR
The euro hit its lowest in more than two months against the
dollar at $1.2565 as the report added to investors' worries over
the region. The Polish zloty <EURPLN=> and Hungarian forint
<EURHUF=> hit record lows against the euro and the Czech crown
<EURCZK=> fell to its lowest since Oct 2005.
Shares in the western lenders that control emerging Europe's
banking market also slumped. UniCredit hit a 12-year low of
1.111 euros, down 8 percent; Erste an all-time low of 7.00
euros, down 18 percent; KBC <KBC.BR> was down as much as 14
percent and Societe Generale <SOGN.PA> 10 percent.
Five-year credit defaults swaps on UniCredit also widened by
38.5 basis points to around 210 basis points.
"The market is increasingly pricing the bear case," said
Francois Boissin, a bank analyst at Exane BNP Paribas. "The key
risk for shareholders is to go through a heavy nationalisation
process where you can lose everything."
With a relatively small number of banks concentrated in a
handful of countries, some very exposed western European
sovereigns have come under pressure for fears of a knock-on
effect of potential emerging European bank failures.
Austria is by far the most exposed to the region, as its
banks have lent the equivalent of 75 percent of Austria's GDP to
clients in emerging Europe. []
The Alpine country this month began to lobby for a stability
package for emerging Europe due to be presented at the next
meeting of European finance ministers, but is facing resistance
from the European Commission and Germany. []
The spread of Austrian and Greek 10-year bonds <AT10YT=RR>
over German Bunds widened to a lifetime high of 124 basis points
and 300.8 basis points, respectively, on Tuesday.
(Additional reporting by Jane Baird and Carolyn Cohn in London,
editing by Stephen Nisbet)
