Viennese banks made a hard push into the newly opened markets of Eastern Europe after the end of the Cold War. The banks of Vienna were not the only Western lenders looking to take a stake in the former Soviet Bloc, but the Austrians, thanks to geography as well as history bet very big on Eastern Europe and Russia.
Now as tensions rise, as Russia takes back the Crimea and looks to expand, possibly, into the Ukraine, Austrian banks are in the crossfire. The way things are playing out now, Austria could have bigger implications for the periphery European Union. This is why members of the EU have asked for caution when applying sanctions.
The worst case scenario is that the European banks would lose their subsidiaries in Russia as tit for tat continues to escalate to a point where it becomes impossible to do business there. That is worse case. Whatever happens we expect banks with a presence in Russia like Deutsche Banks, JP Morgan Chase and others to have profits squeezed in a once lucrative market. European banks have a whopping $194 billion exposure compared to American banks who have a mere $37 billion. This is why Europe has been slow and reluctant to impose sanctions on Russia at this time.
Austria Will Feel the Biggest Economic Squeeze
The effects on Austria are direct and are being felt now. Two of their biggest banks, Raiffeisen and Bank Austria (a unit of UniCredit) have very large operations in the Ukraine. Other banks, like Societe General from France are also present in Russia. Austria, out of the whole EU has the largest risk exposure of almost $17 billion. This is the largest exposure in relation to size of its banking system as it is 1.4 percent of the Austria’s banking assets.
Bad loans have already started plaguing the newly annexed Crimean peninsula before the crisis started for Raieffeisen as profits have been sinking for a while before hostilities began, Currently €1.2 billion of Ukrainian loans to the bank are classified as late or behind schedule.
Austrian Banks are Squarely in the Crosshairs
The Crimean crisis is just the latest setback for Austria as it looked to expand heavily in the Eastern European Bloc. They have a history that goes back the Hapsburgs into modern day of trying to expand, financially into this former Soviet Bloc. This includes Poland and Hungary. In 2008, Austria started paying aid to its banks with direct capital and investment. This number stands at €14 billion including €2.5 billion to Raiffeisen alone. This aid is equal to nearly 5 percent of the country’s GDP (Gross Domestic Product). While not as high as Greece or Ireland, it is a problem for the debt ridden EU.
When they entered this market they knew the risk was enormous. Stability in the Ukraine and former Soviet Bloc has never been a sure bet. They knew if there was a problem then the taxpayers would foot the bill. That is precisely where we are at now.
Binary Options Take for the Day:
This will eventually take its toll on the Euro. We are already seeing the Euro lose some steam versus the Dollar and other Forex pairs. Also, debt is a major concern and wil begin to effect the equity markets.
Discussion:
What do you think? The Crimean crisis is getting bigger. The EU is ridden with debt and has an already shaky banking system. Is it time to hedge portfolios by considering the emerging markets in the Pacific Rim? Sound off below in comments.