Europe’s Russian Connections


By Aasim M. Husain, Anna Ilyina and Li Zeng

(Version in Русский)

The conflict in Ukraine and the related imposition of sanctions against Russia signal an escalation of geopolitical tensions that is already being felt in the Russian financial markets (Chart 1). A deterioration in the conflict, with or even without a further escalation of sanctions and counter-sanctions, could have a substantial adverse impact on the Russian economy through direct and indirect (confidence) channels.

Chart 1

CESEE-Blog_7-30-14_final.001

What would be the repercussions for the rest of Europe if there were to be disruptions in trade or financial flows with Russia, or if economic growth in Russia were to take a sharp downturn? To understand which countries in Europe might be most affected, we looked at the broad channels by which they are connected to Russia—their trade, energy, investment, and financial ties. See also separate blog on Russia-Caucasus and Central Asia links.

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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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Time Not On Our Side: Tough Decisions Needed to Strengthen Financial Stability


By José Viñals

(Versions in  عربي中文EspañolFrançaisРусский日本語)

Recent policy actions in Europe, the United States, in emerging markets, and here in Japan, where I’m attending the IMF-World Bank annual meetings, have improved investor sentiment and helped markets rebound in recent months.

Yet our latest assessment is that confidence is still very fragile and risks have increased, when compared to the IMF’s last report in April. Policymakers need to do more to gain lasting stability.

The principal risk remains the euro area. The forces of financial and economic fragmentation have widened the divide between countries at the core and the “periphery” of the euro zone. Faltering confidence and policy uncertainty have led to a pullback of cross-border private capital flows from the periphery—quite an extraordinary phenomenon within a currency union.

This has driven up funding costs to governments and banks, as well as for companies and households, and, in turn, threatening a vicious downward economic spiral.

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Convergence, Crisis, and Capacity Building in Emerging Europe


by Nemat Shafik

Central, Eastern and Southeastern Europe has been through a lot. In two short decades, the region moved from a communist planned system to a market economy, and living standards have converged towards those in the West.

It has also weathered major crises: first the break-up of the old Soviet system in the early 1990s, then the Russian financial crisis in 1998, and finally the recent global economic crisis. How did these countries do it?

From the Baltic to the Balkans, the region’s resilience and flexibility are the result of hard work and adaptability. But more than anything, it is the strong institutions built over the last two decades that have enhanced the region’s ability to deal with the momentous challenges of the past, the present—and those to come.

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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.

Debt Hangover: Nonperforming Loans in Europe’s Emerging Economies


By Christoph Rosenberg and Christoph Klingen

Some hangovers take more than a good night’s sleep to get over. It’s been three years since the global economic crisis put an abrupt end to emerging Europe’s credit boom, but neither lenders nor borrowers are in much of a party mood. One key reason: many of the loans so readily dished out before the crisis have now gone sour.

Festering bad loans are a problem on many fronts:  banks, credit supply, economic growth, and people all suffer. Take Japan’s lost decade. There too, a credit boom ended in tears, new lending subsequently went from too much to too little, and a vicious cycle of credit squeeze, declining asset and collateral values, and economic paralysis followed.

In emerging Europe, the share of loans classified as nonperforming—many of them household mortgages—have exploded from 3 percent before the crisis to 13 percent at the peak. As can be seen in the chart below, levels in some parts of the Baltics and Balkans are already at par with previous financial crises elsewhere.

Tackling bad loans

Nobody wants this dire script to replay in emerging Europe. Policymakers, bankers, and international financial institutions therefore got together under the Vienna Initiative to identify ways to tackle nonperforming loans. A working group co-chaired by the IMF and World Bank just presented a report that analyzes the problem and offers a way out.

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Unwinding Crisis Policies in Europe: Are We There Yet?


By Marek Belka

Much is riding on getting the timing of the exit right from the stimulative policies used to combat the global economic and financial crisis. This is something that IMF Managing Director Dominique Strauss-Kahn has repeatedly emphasized. Exiting too early may jeopardize the recovery. But exiting too late may sow the seeds for the next crisis, as Wolfgang Munchau and others have argued recently. I also agree with Jean Pisani-Ferry and his colleagues that exiting in an uncoordinated fashion will lead to a renewed build up of financial instability.

To successfully unwind the extraordinary policy measures taken in response to the crisis, we need more than just a good sense of the state of the economic recovery and the degree of financial stability. We also need to know to what extent the global economy currently is influenced by those supportive policy measures. Is it safe yet to change course?

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