TEXT-S&P on emerging Europe sov. risk & parent bank ownership

                                
 (The following statement was released by the ratings agency)
                                
 June 4 - Foreign direct investment in emerging Europe's
financial sectors has expanded dramatically since the
mid-1990s, particularly from Western Europe. A new Standard &
Poor's report published today, titled "Friends In High Places?
Foreign Bank Ownership And Emerging Europe Sovereign Ratings,"
examines to what extent, in the event of a crisis, foreign bank
ownership can mitigate the risk of financial sector contingent
liabilities for emerging European sovereigns.
                                
 "Rapidly burgeoning stocks of domestic credit, fuelled in a
number of countries by subsidiaries of foreign banks, have
significantly increased the level of monetization in emerging
European economies," Standard & Poor's credit analyst Remy
Salters said. "This phenomenon is welcome, but it comes with an
increased potential cost of bank bailouts in the event of a
financial system crisis."
                                
 Although foreign ownership can sometimes restrain credit
expansion, as it did in the case of Poland, there is evidence
that, in some countries, foreign participation in the banking
system has helped fan the flames of already overheating
economies and/or exacerbated inappropriate economic policy
mixes by funding imbalances. In several sovereigns, related
capital account inflows have partly financed large current
account deficits.
                                
 Should these inflows from parent banks slow or reverse, a
hard landing for the economy could follow.
                                
 "Although we believe the risk of parent bank withdrawal is
remote, a worst-case scenario could include balance-of-payment
difficulties and sharp currency depreciations," Mr. Salters
said. "This, in turn, would lead to multiple second-round costs
for the sovereign, including in some countries higher
contingent liabilities as unhedged foreign currency borrowing
turns bad."
                                
 Given emerging Europe's degree of dependence on parent bank
ownership, Standard & Poor's has created an aggregate measure
that aims to differentiate the extent to which, in the event of
a crisis, parent banks' financial strength and commitment to
their subsidiaries would moderate a sovereign's contingent
liability. This measure, called the "contingent liability
moderator", takes into account the likelihood of parent support
and the financial strength of parent banks as indicated by
their ratings.
                                
 The results of the exercise are shown below, where 100% is
the best contingent liability moderator attainable:
                                
 Estonia            54%
                                
 Czech Republic     54%
                                
 Lithuania          41%
                                
 Slovak Republic    33%
                                
 Croatia            26%
                                
 Poland             24%
                                
 Romania            22%
                                
 Latvia             21%
                                
 Hungary            20%
                                
 Bulgaria           18%
                                
 Serbia              7%