Data Spotlight: Flows to Eastern Europe: Foreign banks have supported eastern European banks, but the financial crisis has reversed this trend

Recovery from the deepest recession in 60 years has started. But sustaining it will require delicate rebalancing acts, both within and across countries. IMF chief economist Olivier Blanchard writes in our lead article that the turnaround will not be simple. The crisis has left deep scars that will affect both supply and demand for many years to come. This issue of F&D also looks at what’s next in the global crisis and beyond. We look at ways of unwinding crisis support, the shape of growth worldwide after the crisis, ways of rebuilding the financial architecture, and the future of reserve currencies. Jeffrey Frankel examines what’s in and what’s out in global money, while a team from the IMF’s Research Department looks at what early warning systems can be expected to deliver in spotting future problems. In our regular People in Economics profile, we speak to Nobel prize winner Daniel Kahneman, whose work led to the creation of the field of behavioral economics, and our Picture This feature gives a timeline of how the Bank of England’s policy rate has fallen to its lowest level in 300 years. Back to Basics gives a primer on monetary policy, and Data Spotlight looks at how the crisis has affected the eastern European banking system.

Abstract

Recovery from the deepest recession in 60 years has started. But sustaining it will require delicate rebalancing acts, both within and across countries. IMF chief economist Olivier Blanchard writes in our lead article that the turnaround will not be simple. The crisis has left deep scars that will affect both supply and demand for many years to come. This issue of F&D also looks at what’s next in the global crisis and beyond. We look at ways of unwinding crisis support, the shape of growth worldwide after the crisis, ways of rebuilding the financial architecture, and the future of reserve currencies. Jeffrey Frankel examines what’s in and what’s out in global money, while a team from the IMF’s Research Department looks at what early warning systems can be expected to deliver in spotting future problems. In our regular People in Economics profile, we speak to Nobel prize winner Daniel Kahneman, whose work led to the creation of the field of behavioral economics, and our Picture This feature gives a timeline of how the Bank of England’s policy rate has fallen to its lowest level in 300 years. Back to Basics gives a primer on monetary policy, and Data Spotlight looks at how the crisis has affected the eastern European banking system.

Foreign (mostly western European) banks dominate the eastern European banking system. Overall financing from foreign sources for countries in eastern Europe increased from about $96 billion in December 2003 to a peak of $550 billion in September 2008. All four subregions—the Baltics, central and eastern Europe, the Commonwealth of Independent States (CIS), and southeastern Europe—showed a significant increase in their dependence on foreign banks, led by a ninefold jump in five years in the foreign liabilities of the banking sector in the CIS to $280 billion. With the worsening of the global financial crisis in September 2008, this trend reversed for all groups.

uA18fig02

Banks across eastern Europe have received large amounts of funds from foreign banks.

(liabilities to nonresidents, billion dollars)

Citation: Finance & Development 0046, 003; 10.5089/9781451953756.022.A018

Foreign liabilities rose, on average, as a ratio to total liabilities, from 12 percent to 19 percent for all countries. The highest foreign-bank dependence is found in the Baltic countries, with the ratio ranging from 33 percent in December 2003 to a peak of 50 percent in October 2008.

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The Baltic countries have the highest foreign-bank dependence in the region.

(liabilities to nonresidents, percent of total liabilities, end of year)

Citation: Finance & Development 0046, 003; 10.5089/9781451953756.022.A018

1Data for 2009 refer to end of May.

This increase in foreign financing was paralleled by extremely high rates of credit growth, in both national and foreign currency, to the private nonfinancial sector—mainly to nonfinancial corporations and households. However, the deterioration in the global financial environment since September 2008 brought about a rapid decline in the growth rate of credit, which actually has been negative since February 2009 for the Baltic and southeastern European countries.

uA18fig04

High rates of credit growth in foreign currency dropped sharply after the crisis.

(credit to private nonfinancial sector in foreign currency, annual percent change)

Citation: Finance & Development 0046, 003; 10.5089/9781451953756.022.A018

uA18fig05

By crisis onset, firms and households were the largest recipients of foreign currency credit.

(claims on domestic sectors in foreign currency, September 2008, percent)

Citation: Finance & Development 0046, 003; 10.5089/9781451953756.022.A018

About the database

The data are derived from the standardized forms currently used by 114 countries to report monetary data to the Statistics Department of the IMF. Countries were arranged into four groups: CIS (Armenia, Azerbaijan, Belarus, Georgia, Moldova, Russia, and Ukraine); southeastern Europe (Albania; Croatia; Macedonia, FYR; Romania; Serbia; and Turkey); the Baltics (Estonia, Latvia, and Lithuania); and central and eastern Europe (Czech Republic, Hungary, Poland, and Slovak Republic). Most of the data used in this article can be accessed via International Financial Statistics Online at www.imfstatistics.org/imf/

Prepared by José C. Moreno and Ricardo Davico of the IMF’s Statistics Department.

Finance & Development, September 2009
Author: International Monetary Fund. External Relations Dept.
  • View in gallery
  • View in gallery

    Banks across eastern Europe have received large amounts of funds from foreign banks.

    (liabilities to nonresidents, billion dollars)

  • View in gallery

    The Baltic countries have the highest foreign-bank dependence in the region.

    (liabilities to nonresidents, percent of total liabilities, end of year)

  • View in gallery

    High rates of credit growth in foreign currency dropped sharply after the crisis.

    (credit to private nonfinancial sector in foreign currency, annual percent change)

  • View in gallery

    By crisis onset, firms and households were the largest recipients of foreign currency credit.

    (claims on domestic sectors in foreign currency, September 2008, percent)