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BIS: A time for unity

The IFC’s response to the banking crisis in emerging Europe could offer guidance for those seeking a solution to Greece’s woes.

If there is one lesson in banking and finance that works in both bull and bear markets, it is to avoid the herd. Although it can be fun on the way up, when the markets come crashing down a stampede for the exits makes matters much more difficult to manage.

The slow burn surrounding Greece’s sovereign and bank debt crisis is a case in point. With the markets now seemingly in a rout and bonds trading at half their face value, there seems little evidence of an orderly market response. The spectre of a mass panic affecting all banks in Western Europe in the event of a Greek default is what frightens everyone. It was no surprise, at the end of June, to find the over-exposed French banks trying to push through a Brady-style maturity extension on Greek sovereign debt.

Vienna Initiative

And yet there is an example of banks having been cajoled into acting as one, forsaking their own narrow economic interests: the Vienna Initiative. Devised by Jyrki Koskelo at the International Finance Corporation two years ago, the initiative sought to find a way to stop all banks leaving Eastern Europe in one mad dash. The problem was that with more than half of Central and Eastern Europe’s banks owned by Western European institutions, the region was highly vulnerable to a mass withdrawal of bank funding.

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