Central, Eastern, and South-Eastern Europe: Safeguarding the Recovery as the Global Liquidity Tide Recedes


By Reza Moghadam, Aasim M. Husain, and Anna Ilyina

(Version in Türk)

Growth is gathering momentum in most of Central, Eastern, and South-Eastern Europe (CESEE) in the wake of the recovery in the euro area. Excluding the largest economies—Russia and Turkey—the IMF’s latest Regional Economic Issues report  projects the region to grow 2.3 percent in 2014, almost twice last year’s pace. This is certainly good news.

Figure 1

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Lost & Found in Eastern Europe: Replacing Funding by Western Europe’s Banks


By Bas Bakker and Christoph Klingen

With Western Europe’s banks under pressure, where does this leave Europe’s emerging economies and their financial systems that are dominated by subsidiaries of these very same banks?  There is little doubt that the era of generous parent-funding for subsidiaries is over.  But parent bank deleveraging—selling off assets, raising capital, and reducing loans, including to their subsidiaries—need not translate into a reduction of bank credit in emerging Europe.

A credit crunch can be avoided as long as parent banks reduce exposures gradually and domestic deposits, other banks, and local financial markets fill the void. Policymakers should create the conditions for this to happen.

The ties that bind

The dependence of the banking systems in emerging Europe on Western European banks is well known:

  • Ownership— foreign banks control more than half of the banking systems in most of Central, Eastern, and Southeastern Europe. Their share exceeds 80 percent in Bosnia, the Czech Republic, Croatia, Estonia, Romania, and Slovakia. Only in Russia, Ukraine, Belarus, Moldova, Slovenia, and Turkey do they not dominate.
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