Insight: Credit noose tightens slowly in central Europe

Thu Dec 8, 2011 1:57pm EST
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By Marton Dunai

SZEKESFEHERVAR, Hungary (Reuters) - For Hungarian businessman Ervin Majdan, membership of the European Union used to be a one-way ticket to prosperity.

But the border-free access to markets and capital that once boosted his printing business is now threatening to crush it.

The euro zone debt crisis has depressed demand, undermined Hungary's forint currency and squeezed bank lending. That has forced former chemist Majdan to cut his once 75-strong workforce by half, shutter two of his three shops and has hit profits.

"Big banks are leaving the small business sector, or are demanding extremely tough conditions and more and more collateral," said Majdan, a stocky man with a courteous manner and easy smile.

"We can go to smaller banks, which are still willing to talk to smaller companies, but they demand higher rates, so we end up squeezed on that end. Worst of all, some banks just won't lend, period," the 55-year-old told Reuters from his office in the industrial zone at Szekesfehervar, southwest of Budapest.

Economists raised the alarm about the region last month after regulators in Austria, whose banks dominate lending in emerging Europe, said three lenders needed extra capital.

The news sparked renewed concerns, which first arose in 2008, that the banks could withdraw capital from their local subsidiaries, cut financing lines, or sell units to raise cash, putting pressure on a region already suffering moribund domestic demand and contagion from the euro zone.

The European Banking Authority has told Europe's banks they must raise 106 billion euros by the end of June to ensure they can withstand shocks. A big worry is that these banks will choose to shrink their loans to meet the capital ratio requirements, rather than raise capital.   Continued...