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UNCLAS SECTION 01 OF 02 ISTANBUL 000587
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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