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Viewing cable 08ISTANBUL587, BSEC BANKING GROUP DISCUSSES FINANCIAL CRISIS

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Reference ID Created Released Classification Origin
08ISTANBUL587 2008-11-20 09:09 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Istanbul
VZCZCXRO5434
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHIT #0587/01 3250909
ZNR UUUUU ZZH
P 200909Z NOV 08
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 8610
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
UNCLAS SECTION 01 OF 02 ISTANBUL 000587 
 
SIPDIS 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - JROSE/KMATHIESEN 
USDOC FOR 4200/ITA/MAC/EUR/PDYCK/CRUSNAK 
 
E.O. 12958: N/A 
TAGS: EFIN ECIN
SUBJECT: BSEC BANKING GROUP DISCUSSES FINANCIAL CRISIS 
 
Sensitive but Unclassified, Please Protect Accordingly. Not 
for Internet Distribution. 
 
1.  (SBU) Summary.  At the request of the BSEC Council of 
Ministers, the BSEC Working Group on Banking and Finance met 
in a special session on November 18 to discuss the effects of 
the on-going international financial crisis.  Representatives 
from eight of the twelve BSEC member states as well as the 
Black Sea Trade and Development Bank and the BSEC Business 
Council made presentations; four members (Albania, 
Azerbaijan, Moldova and Turkey) were not represented at the 
meeting.  In response to a request from the BSEC Secretary 
General, econoff made a presentation on the U.S. financial 
rescue package as well as the results of the G-20 Summit. 
End Summary. 
 
2.  (SBU) The October 23 meeting of the BSEC Council of 
Ministers of Foreign Affairs called for an extraordinary 
meeting of the BSEC Working Group on Banking and Finance to 
discuss the global financial crisis.  The working group was 
tasked with assessing vulnerabilities as well as exploring 
possible regional approaches to ameliorating the effects of 
the crisis.  The working group met in special session at BSEC 
headquarters in Istanbul on November 18. 
 
3.  (SBU) BSEC member states include three EU member states 
(Greece, Bulgaria and Romania) and two G-20 countries (Russia 
and Turkey) as well as a number of small countries not 
particularly well-integrated into international financial 
markets (Armenia, Moldova), so the effects of the crisis as 
well as government/central bank responses vary considerably 
from member to member.  The following notes were drawn from 
presentations made by member state representatives. 
 
--Armenia:  Armenia has not felt much of an effect from the 
crisis, because it is not well-integrated into international 
financial markets.  However the government and central bank 
worry that continued problems in the Russian economy could 
adversely affect Armenia, which relies heavily on remittances 
to support consumer spending.  The central bank is 
considering lowering the reserve requirement for banks and/or 
guaranteeing bank deposits if liquidity becomes a problem in 
the future. 
 
--Bulgaria:  The banking system, approximately 80% of which 
is controlled by foreign banks, has been relatively 
unaffected.  The Bulgarian government is focused on 
transparent fiscal and monetary policy and believes the 
currency board arrangement (in place since 1997) will assist 
in maintaining macroeconomic stability.  The government is 
considering contingency measures including: increased 
guarantees on bank deposits, a buy back system for government 
securities and lowering the reserve requirement. 
 
--Georgia:  It is difficult to disaggregate the effects of 
the Russian invasion in August and the financial crisis, but 
the central bank representative indicated that the "greater 
effect was from the war."  FDI was severely affected, 
approximately 13% of all bank deposits were withdrawn in a 
one-month period, banks stopped lending and consumer spending 
dried up.  In response the central bank loosened monetary 
policy, lowering interest rates, granting a temporary waiver 
on reserve requirements and serving as a lender of last 
resort.  Georgia does not guarantee bank deposits.  There is 
sufficient liquidity in the system now, but banks are 
reluctant to lend.  Georgia has a $750 IMF million stand by 
agreement. 
 
--Greece:  A representative from the Greek consulate 
presented a paper on a plan currently under discussion in the 
Greek parliament to enhance liquidity.  The plan involves the 
voluntary sale by commercial banks of preferred shares to the 
central government.   Banks who chose to issue preferred 
shares would benefit from government guarantees on new 
medium- to long-terms loans.  The plan also includes a 
provision for the issuance of special government bonds to 
finance loans to SMEs as well as housing loans. 
 
--Romania:  Romania has already felt the effects of the 
crisis, most notably as a speculative attack on its currency 
in October which the central bank fended off by injecting 
liquidity into the foreign exchange market and raising 
interest rates.  Romania is heavily reliant upon the EU for 
exports, employment and remittances.  The government is 
focused on fiscal prudence and tight budget deficits to 
maintain macroeconomic stability, but is considering support 
for the real sector possibly focused on the 
 
ISTANBUL 00000587  002 OF 002 
 
 
construction/infrastructure sectors as well as SMEs. 
Bulgaria has already increased the government guarantee on 
bank deposits from 20,000 euros to 50,000 euros and has 
suspended capital gains taxes for individuals. 
 
--Russia:  GDP growth is expected to drop in 2009; however, 
balance of payments as well as international reserves are 
stable.  There has been a significant reduction in consumer 
demand as well as an outflow of capital from Russia.  The 
G-20 Summit was a very useful initiative and has begun a 
broad international discussion that will reform the global 
financial infrastructure. 
 
--Serbia:  The Serbian consul general explained that 
financial experts were unable to attend the meeting because 
they are attempting to reach an agreement with an IMF team in 
Belgrade this week on a $550 million stand by agreement.  The 
IMF conditioned the agreement on a reduction in public 
expenditures that could result in a significant increase in 
unemployment (from 12% to 15%.)  The Serbian government has 
increased the guarantee on bank deposits from 20,000 euros to 
50,000 euros. 
 
--Ukraine:  The crisis led to widespread turmoil in the 
Ukrainian economy affecting mortgages, commercial real estate 
and the real sector.  The worldwide decline in demand for 
steel products has been particularly difficult for Ukraine; 
production in this sector is down 30% and massive lay-offs 
are expected in the near future.  The IMF has approved a 
$16.4 billion stand by agreement with Ukraine. 
 
4.  (SBU) In response to a request made by the BSEC Secretary 
General, DPO made a presentation on the USG response to the 
crisis and also discussed outcomes of the November 15 G-20 
Summit on Financial Markets and the World Economy.  She 
described USG actions to protect the U.S. economy including 
Treasury's voluntary capital purchase program, the systemic 
risk exception to the FDIC act and the Commercial Paper 
Funding Facility, noting that in the midst of market turmoil, 
the USG's primary focus is recovery and repair.  The 
discussion of G-20 summit outcomes focused on the agreement 
to implement pro-growth policies, to affirm free market 
principles, to reject protectionism and to address the needs 
of the poor as well as the need to improve and coordinate 
regulatory regimes and to reform international financial 
institutions.  BSEC distributed the summit declaration and 
action plan to working group participants.  The Black Sea 
Trade and Development Bank representative warned member 
states to prepare for a sustained (three- to five-year) 
period of slow growth and a contraction in the real economy. 
He also voiced concern over IMF agreements that bind BSEC 
member states to policy prescriptions and fiscal targets that 
have not changed to accommodate the new global environment. 
 
5.  (SBU) Comment.  The working group meeting was a useful 
forum for an exchange of information on member state actions 
in response to the crisis and for a brief overview of G-20 
summit outcomes.  However, given the vastly different levels 
of exposure to global financial markets among the member 
states, not to mention the requirements placed upon the three 
EU members who belong to BSEC, it is unlikely that the 
working group will ever be in a position to coordinate a 
regional response to a financial crisis.  End Comment. 
 
 
WIENER