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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The Trillion Dollar Question: Who Owns Emerging Market Government Debt


By Serkan Arslanalp and Takahiro Tsuda

(Version in EspañolFrançaisPortuguêsРусский中文 and 日本語)

There are a trillion reasons to care about who owns emerging market debt.  That’s how much money global investors have poured into in these government bonds in recent years —$1 trillion.  Who owns it, for how long and why it changes over time can shed light on the risks; a sudden reversal of money flowing out of a country can hurt.  Shifts in the investor base also can have implications for a government’s borrowing costs.

What investors do next is a big question for emerging markets, and our new analysis takes some of the guesswork out of who owns your debt.   The more you know your investors, the better you understand the potential risks and how to deal with them.

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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.

Crisis Lessons to Remember for Europe’s Policymakers


 By Marek Belka

(Version in ελληνικά)

Let’s think now about some of the lessons from the global economic crisis for Europe’s policymakers. In my previous five blogs, I’ve discussed the challenges faced by both advanced and emerging European economies as we emerge from the acute phase of  the crisis. The questions I attempted to answer have included: In what shape and form will European integration survive the crisis? Will eastern Europe be able to sustain its remarkable catching up with living standards in western Europe?

For my final blog in this series on iMFdirect, I have decided to add a personal touch and draw on my experience as a former policymaker. So while this article builds on the previous five posts, it goes beyond them and includes some highly subjective comments on what lessons I believe the reformers in eastern Europe should take away from the crisis. And, although my primary focus is on countries outside the eurozone, it is clear that the eurozone will need to address long-term challenges, as I pointed out in my post After the Crisis, Much Still at Stake for Eurozone.

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Reigniting Growth in Emerging Europe


By Marek Belka

As the deep recession in Europe’s emerging market countries finally comes to an end, the question on everyone’s minds is where  growth in the region will come from in the years ahead. Exports are rebounding, and domestic demand is showing signs of stabilization. Most countries will see positive GDP growth this year—a stark difference from 2009. But a return to the high growth rates that preceded the crisis is highly unlikely.

An unbalanced picture

During the boom years, Eastern Europe grew rapidly, but growth in many countries was rather unbalanced. Capital inflows were large, but to a great extent went to the “non-tradable” sector—in particular, real estate, construction, and banking. Capital flows boosted domestic demand rather than supply—leading to a surge in imports, current account deficits that widened to unprecedented levels, and overheating economies.

This kind of growth will not come back. The domestic demand boom came to an end in the fall of 2008.  In the global financial turmoil that followed the demise of Lehman Brothers, capital flows to Eastern Europe plunged, leading to a sharp decline in domestic demand. Further exacerbated by a decline in exports, this contributed a deep economic downturn—in the Baltics and Ukraine, GDP declined between 14 and 19 percent last year.

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