By Valentina Pop

EUobserver

With large parts of their banking sector in French, Austrian or Greek hands, eastern European countries are wary that upcoming rules on bank recapitalisation will allow regional subsidiaries to be drained of money, putting their economies at risk.

"We cannot accept a recapitalisation through money withdrawal, for instance from the Romanian market, in order to withstand the crises within the eurozone," Romanian President Traian Basescu said on Sunday (23 October) after the first part of an EU summit which will continue on Wednesday to set out conditions for a ?100 billion cash injection into Europe's most troubled lenders.

He also blamed his fellow colleagues' indecision for driving up borrowing costs in eastern Europe due to the worsening situation in Greece.

Half of Romania's banking sector is owned by cash-strapped Austrian and Greek banks, such as Erste, Raiffeisen, Alpha Bank and Eurocredit. The country's national bank has called on foreign subsidiaries to raise their capital in Romania if their parent banks face troubles back home due to Greek exposure.

On Monday, Austria's Erste - the biggest bank in Romania - said it is set to report a net loss of almost ?1 billion this year due to write-downs and charges on its units in Hungary and Romania and the European sovereign debt crisis.

Hungary will now seek to expand regulation of its bank sector, particularly links between investment and retail banking operations, so as to avoid the state having to bail out troubled financial institutions, Prime Minister Viktor Orban said Monday. His comments come after a day of mass protests against bank bail-outs and against his government's strong grip on media freedoms.

Neighbouring Bulgaria is also set to face troubled times ahead, as 30 percent of its banks are in Greek hands.

Experts support the idea that bank recapitalisation should not neglect subsidiaries in eastern Europe.

"We agree with the Romanian president's message that any recapitalisation has to benefit the group as a whole," Jeromin Zettelmeyer, deputy chief economist with the European Bank for Reconstruction and Development (EBRD) told this website.

In the event of debt restructuring, Greek banks "will require a significant recapitalisation", with the London-based EBRD seeing two scenarios: One where everything goes well and subsidiaries can go on without "being cut off from parent banks" and one when restructuring "is not handled perfectly" and national governments in Bulgaria, Romania and Serbia will have to intervene to prop the subsidiaries.

Zettlemeyer said governments in eastern Europe have "contingency plans" ready and that the International Monetary Fund would back such an action with financial support.

That, however, would increase the countries' foreign debt and widen the budget deficit governments are currently struggling to keep under control.

A good deal on Wednesday could turn around gloomy economic forecasts, the economist said, however.

Currently, the EBRD has lowered the growth predictions for the region to around one percent, due to the sovereign debt crisis in the eurozone. "I absolutely agree that the longer it takes to have an agreement, the bigger the problems," Zettlemeyer said.

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