A stock in excess of €900 billion of nonperforming loans continue to clutter the European banking system, impeding economic growth. This issue remains a key challenge for policy makers. As we show in our latest Global Financial Stability Report, part of the solution to address this legacy is an upgrade in legal systems. Current inefficiencies—long foreclosure times and insolvency procedures—are a reason for the gap between the value of loans on bank balance sheets and the price investors are willing to pay. A reliable legal environment and an efficient judicial system maximize the value of nonperforming loans (NPLs), reduce the value gap and give banks greater incentive to get NPLs off the books. Our analysis, using time to foreclose as a proxy for effective insolvency regimes, shows there is a large upside for new lending capacity in the euro area (Chart 1).
Problem loans are clogging the arteries of Europe’s banking system. The global financial crisis and subsequent recession have left businesses and households in many countries with debts that they cannot repay. Nonperforming loans as a share of total loans in the EU have more than doubled since 2009, reaching €1 trillion—over 9 percent of the region’s GDP—by end-2014. These loans are particularly high in the southern part of the euro area, as well as in several Eastern and Southeastern European countries. Only a handful of countries have managed to lower their nonperforming loan ratio to below its post-crisis peak.
Filed under: Advanced Economies, Economic Crisis, Economic research, Europe, Financial Crisis, Fiscal policy, growth, IMF, International Monetary Fund, Investment, Reform | Tagged: debt, euro area, Europe, European Central Bank, non-performing loans, recession | Leave a comment »
Six years after the global financial crisis, Europe continues to be weighed down by high levels of corporate debt and millions of nonperforming loans. Small and medium-sized enterprises (SMEs) bear a disproportionately heavy burden. Their nonperforming loan ratios are on average more than double those of their larger corporate cousins. This is worrisome. SMEs are the lifeblood of the European economy, comprising 99 percent of all businesses and employing nearly two of every three workers in Europe. Given the importance of smaller businesses to the economy, addressing their problem loans could lay the foundation for a more robust and sustainable economic recovery.
Filed under: Advanced Economies, Economic Crisis, Economic research, Europe, Financial Crisis, Fiscal policy, Government, growth, IMF, International Monetary Fund, Investment, Reform | Tagged: Cyprus, euro zone, Europe, European Central Bank, Greece, Ireland, non-performing loans, nonperforming loans, small and medium-sized enterprises | Leave a comment »
With all eyes on the euro area, it is easy to forget that only a few years ago the emerging economies of Europe, from the Baltic to the Black Sea, went through a deep economic and financial crisis. This crisis is the topic of a new book that we will introduce to the public this week in Bucharest, London, and Vienna.
One lesson is that your best chance to prevent deep crises is forcefully addressing booms before they get out of hand. Another is that even crises that look abysmal can be contained and overcome— policies to adjust the economy and international financial support do work.
In the half decade leading up to the crisis, easy global financial conditions, confidence in a rapid catch-up with western living standards, and initially underdeveloped financial sectors spawned a tremendous domestic demand boom in the region. Western banking groups bankrolled the bonanza, providing their eastern subsidiaries with the funds to extend the loans that fueled the domestic boom. Continue reading
Filed under: Economic Crisis, Emerging Markets, Europe, International Monetary Fund, Public debt | Tagged: Baltics, Bucharest, Bulgaria, credit growth, crisis, debt, economic growth, emerging economies, Estonia, euro area, Europe, London, non-performing loans, Poland, Vienna Initiative | 9 Comments »
In the Euro zone, growth is close to zero, reflecting positive but low growth in the core countries, and negative growth in most periphery countries. In the United States, growth is positive, but too low to make a serious dent to unemployment.
Growth has also slowed in major emerging economies, from China to India and Brazil.
Downside risks, coming primarily from Europe, have increased.
Let me develop these themes in turn.
Filed under: Advanced Economies, Economic Crisis, Economic outlook, Economic research, Emerging Markets, Employment, Europe, Fiscal policy, growth, IMF, International Monetary Fund | Tagged: bank recapitalization, banks, Brazil, capital flows, China, economic policy, economic recovery, euro zone, Europe, exproters, financial markets, fiscal cliff, fiscal consolidation, France, Germany, government debts and deficits, growth, housing, IMF, iMFdirect blog, India, International Monetary Fund, Italy, loans, non-performing loans, Olivier Blanchard, Spain, structural reforms, unemployment, United States, WEO, World Economic Outlook | 10 Comments »
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.
Filed under: Advanced Economies, Economic Crisis, Emerging Markets, Europe, Finance, growth, IMF, International Monetary Fund | Tagged: balance of payments, bank deposits, bank resolution, bank supervisors, banks, Bas Bakker, Belarus, Bosnia, capital, Christoph Klingen, credit, crisis, Croatia, cross-border banks, Czech Republic, debt, deleveraging, deposits, eastern Europe, emerging economies, Estonia, Europe, European Central Bank, financial system, foreign banks, Hungary, IMF, liqudity, Moldova, non-performing loans, policymakers, Romania, Russia, Slovakia, Slovenia, subsidiaries, Turkey, Ukraine, Vienna 2.0 | 2 Comments »