Amidst coronavirus crisis, Southeastern Europe belatedly courts its foreign investors

The pillars of the international financial world, from the IMF to the European Bank for Reconstruction and Development (EBRD), are resurrecting the Vienna Initiative to staunch capital flight from Eastern Europe amidst the coronavirus pandemic. In the first and second Vienna Initiatives, in 2009 and 2012 respectively, international financial organisations, the European central banks, and regulators worked to convince private sector banks and other foreign investors not to pull out of markets in Central and Southeastern Europe as the eurozone debt crisis snowballed.

The Vienna Initiative’s activities are now being ramped up to crisis levels as Southeastern Europe braces for huge capital outflows. Countries like Montenegro and Moldova, for example, make up more than 10% of their GDP from remittances from citizens abroad—a category slated for the steepest drop in recent history. Montenegro and neighbouring Croatia will be further weakened by a disastrous summer season for the tourism industry, which accounts for 20% of each country’s GDP. As Southeastern European economies face coronavirus-induced contractions of up to 10%, it’s vital that commercial lenders and other investors don’t curtail their exposure to these markets.

Unfortunately, the very countries which now need to persuade foreign investors “that they have a real role to play in this crisis and recovery” have made a series of ill-advised moves over the past decade which have shaken overseas investors’ confidence. After the Vienna Initiative addresses current challenges, Southeastern European capitals would be better served by guaranteeing fair treatment to their foreign investors even outside periods of upheaval.

Leaving banks in the cold

One of the key focuses of the new iteration of the Vienna Initiative are the cross-border banks who often play a vital role in Southeastern European financial sectors. In a paper commemorating the 10th anniversary of the first Vienna Initiative, the scheme’s president—and head of the Croatian central bank— Boris Vujčić highlighted how foreign banking groups’ choice to maintain their investments in Central and Southeastern Europe (CESEE) during the eurozone crisis staved off severe debt and currency emergencies.

“Had large banking groups not made that decision, the withdrawal of foreign currency liquidity from CESEE would have been so large that central banks would have likely failed to defend national currencies from severe devaluations,” Vujčić wrote, suggesting that public debt might have become unsustainable.

Vujčić’s native Croatia, however, has created a less-than-welcoming atmosphere for the international banking groups which control some 90% of Croatia’s local banks. Specifically, a disastrous decision to convert loans denominated in Swiss francs (CHF) to loans in euros has shaken foreign investors’ confidence and weakened the Croatian banking sector.

Before the 2008 financial crisis, many Croatians took out CHF loans because their interest rates were lower than those of loans denominated in euros. As the Croatian kuna sank against the Swiss franc, however, Croatians’ debt burden increased—particularly after the Swiss central bank dropped the peg tethering CHF to the euro. Zagreb’s strategy for addressing this caused more problems than it resolved. In 2015, Croatia’s Social Democrats pushed through legislation to convert all the CHF loans to euros, in part in order to curry favour ahead of elections. The retroactive loan conversion sent shockwaves through the Croatian banking sector, inflicting some €1 billion of losses on banks and their international parent groups.

Croatia has ignored the European Commission’s exhortations to rethink the law, which it argued was disproportionate and unfairly penalised banks, and has brushed off the European Central Bank’s opinion that the legislation’s retroactive application might be incompatible with European law. To make matters worse, a series of court decisions has raised fears that banks may be on the hook for an additional €2.5 billion—right as they need to play their part in the Croatian economy’s recovery from the coronavirus. As one Zagreb-based consultant explained, “The duration of the whole Swiss-franc loans story and the surrounding elements of populism—that no hit is too big for the bank—increase the impression that this is not a country attractive to investors”.

Cronyism a further barrier for foreign firms

Elsewhere in the region, would-be foreign investors have been disheartened by widespread cronyism and decades-old patronage networks that have yet to be dismantled. In Bosnia and Herzegovina, for example, the privatization of state-owned firms that had served as the cornerstones of pre-war Bosnia was so badly botched that some of the few foreign investors it managed to attract have fled the country.

After the Dayton Agreement brought peace to Bosnia, the United States pushed for the country’s state-owned giants to be rapidly privatized without first addressing Sarajevo’s gross issues with the rule of law. As a result, the country’s corrupt elites—a motley group of “war profiteers, nationalist-oriented politicians, and remains of the communist nomenclature”—fought first to delay privatization and then to subvert it to ensure that quality assets remained in the hands of their cronies. Some firms which were privatized under these dubious conditions, such as the Birac alumina plant, had to be renationalised after their European investors elected to leave the Bosnian market.

Albania, meanwhile, is still celebrating receiving the green light for EU accession talks in March—but a variety of issues including lingering corruption mean that its European hopes remain “just out of reach” and that Tirana struggles to attract foreign investors. A stunning 66.5% of foreign investors lack confidence in the Albanian judiciary, and a number of high-profile foreign investors have left the country in recent years, bringing their grievances before international arbitration.

Just last month, the International Centre for the Settlement of Investment Disputes (ISCID) confirmed a €110 million fine against Tirana—roughly 1% of the country’s GDP—for illegally expropriating a television station which had criticized the Albanian government and issuing politically motivated arrest warrants against the television station’s owners.

International banks and foreign investors were essential to Southeastern Europe’s recovery after the last financial crisis, and the resurgent Vienna Initiative is hoping that they will serve a similar role in mitigating the downturn caused by the coronavirus. Their reward should be a fairer playing field in the years to come.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes