What a Drag: The Burden of Nonperforming Loans on Credit in the Euro Area


By Will Kerry, Jean Portier, Luigi Ruggerone and Constant Verkoren 

High and rising levels of nonperforming loans in the euro area have burdened bank balance sheets and acted as a drag on bank profits. Banks, striving to maintain provisions to cover bad loans, have had fewer earnings to build-up their capital buffers. This combination of weak profits and a decline in the quality of bank assets, resulting in tighter lending standards, has created challenging conditions when it comes to new lending.

We took a closer look at this relationship and the policies to help fix the problem in our latest Global Financial Stability Report because credit is the grease that helps the economy function.

The stock of nonperforming loans has doubled since the start of 2009 and now stands at more than €800 billion for the euro area as whole (see chart). Around 60 percent of these nonperforming loans stem from the corporate loan book.

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Emerging Market Corporate Sector Debt: A Stitch in Time Could Save Billions


By Julian Chow and Shamir Tanna

(Versions in Español)

Much has been said lately about growing private sector debt in emerging market economies. In our recent analysis, we examined the corporate sector in a number of countries and found their rising levels of debt could make them vulnerable.

Low global interest rates in the aftermath of the global financial crisis and ample amounts of money pouring in from foreign investors have enabled nonfinancial corporations to raise record levels of debt.

figure 1

Credit was readily available in the aftermath of the crisis, and economic expansion enabled earnings to grow healthily, thus helping to prevent leverage from rising too far and too fast.  Recently though, slowing growth prospects are beginning to put pressure on firms’ profitability. Moreover, higher debt loads have led to growing interest expense, despite low interest rates. As a result, the ability of firms to service their debt has weakened (Figure 1).

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A Wish List for China’s Third Plenum


ASinghBy Anoop Singh

(Versions in 中文 and Español)

Hard landing, soft landing, no landing, overheating. Pundits’ views on China’s economy bounce around—often rapidly—between these descriptions.

Just two short months ago, the dominant concern was about a sharp slowdown, below this year’s official growth target of 7½ percent. Now, these fears have retreated, pushed aside by talk of renewed momentum.

Our sense, here at the International Monetary Fund, has always been that economic growth will slightly surpass this year’s official target. But we have also cautioned that China’s economic challenges are growing, and that accelerating reform is critical for containing risks and achieving a smooth transition to sustainable growth.

The upcoming Third Plenum provides an opportunity for the new leadership to provide guidance on how they plan to meet these challenges.

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Giving Credit Where Credit is Due: How to Design Policies that Work


Oppers_desk_portraitBy Erik Oppers

What’s up with weak credit? Five years into the economic crisis credit is still barely growing, and even declining in many advanced economies. Weak credit growth is a major factor holding back the economic recovery and governments have tried every policy they can come up with to jumpstart credit. Still, banks don’t seem to want to lend. Or is it the corporate sector and households that can’t afford to borrow? Many feel these policies are not working. What are policymakers to do?

Our analysis in the most recent Global Financial Stability Report tries to shed light on all this darkness to help countries figure out how to make these policies work. It turns out there is no cookie-cutter solution: the problem differs from country to country and changes over time. For example, in a number of euro area countries, a lackluster demand for loans limited credit growth early in the crisis, but then banks became reluctant to supply more loans as the crisis in Europe intensified in 2012.

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Achieving China’s Great Promise


Murtaza SyedBy Murtaza Syed

(Version in 中文)

Anticipation of the U.S. Federal Reserve’s exit from quantitative easing has dominated headlines in recent weeks. Half a world away, less conspicuously, but no less importantly, China, the globe’s second largest economy, is designing its own policy adjustments: firstly, unwinding the fiscal and monetary stimulus that helped shield it from the Great Recession and lifted global growth (but which also created some vulnerabilities), and secondly transitioning out of a growth model that has generated spectacular growth over the last three decades, but which is now running out of fuel.

Managed well, these twin adjustments would allow China to prolong its economic miracle in a sustainable way, with a significant positive impact for the rest of the world.

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Fixing the Financial Sector: A Change the UK Must Bank On


Krishna SrinivasanBy Krishna Srinivasan

The UK economy is a long way from a strong and durable recovery. Growth has been flat for more than two years now, per capita income is about 7 percent below its pre-crisis peak, unemployment is elevated at 7.8 percent, with youth unemployment alarmingly high at 21 percent, and credit to the economy remains severely constrained.

Recent data are, however, encouraging, and policies should capitalize on the nascent signs of recovery to secure strong growth and rebalance the economy.  Fixing the financial sector, including by addressing banks’ asset quality, is a pre-requisite for a durable UK recovery. See the IMF’s assessment of the UK economy.

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The Evolving Role of the Banking Systems in Central, Eastern and Southeastern Europe


moghadamBy Reza Moghadam

What has been the role of foreign banks in financing growth and convergence in Central, Eastern and Southeastern Europe, and how is that role changing? This is discussed in the first issue of a new series of analytical work on the region called Regional Economic Issues, which we launched at a joint IMF/Czech National Bank conference two weeks ago in Prague.

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