Credit Recovery in Eastern Europe?

Credit financing is the life blood of an economy.  Commercial lending, in particular, has suffered in Central and Eastern Europe as result of the West’s economic and financial difficulties.  However, the reduction in bank financing appears to be slowing.  There even are some positive signs of an ongoing financial blood transfusion.

The fall of the Berlin Wall beckoned banks eastward. Observed S. Adam Cardais of Transitions Online:  “Western banks rushed into Central and Eastern Europe, bringing much-needed capital and expertise.”  However, the resulting credit boom proved unsustainable after the 2008 financial crisis.

The result was an economic “roller coaster ride” in which foreign banks played a role.  Still, the region benefited from the massive investment and still enjoys much higher incomes than before.

And credit finance may finally be recovering.  For instance, Bank Austria, the largest lender to Europe’s emerging economies, recently reported an increase in customer business and net profist.  Over the first nine months of the year write-downs fell 13.4 percent.  Moreover, explained Bank Austria’s Gianni Franco:  “The local funding capabilities of many [Central and Eastern European] subsidiaries have improved through strong growth in deposits, which exceeded growth in loans.”

European Bank for Reconstruction and Development President Suma Chakrabarti noted that the region’s problems should not be blamed on the banks.  He explained:  “The banks have behaved very responsibly, they have behaved very well, and we don’t see the pace of deleveraging that we saw a year ago.  That’s not so much the problem, they’ve got enough capital now.”

Some investment funds also are moving back to the region. Mark Wright of the CF Midas Balanced Growth Fund said his firm preferred Central and Eastern Europe over other areas:  “Those emerging or frontier markets get held back when risk appetite is waning, so we think they were hit harder than other markets and would benefit with risk back on the table.  Valuations in Eastern Europe are particularly attractive.”  He argued that “It’s a very powerful growth story that is not too dependent on the world economy.”

Perceptions of sovereign risk are falling in the region.  Interest charges on government debt have been declining throughout 2012.  That will reduce costs for future borrowing.

The European Bank for Reconstruction and Development, European Investment Bank, and World Bank have developed a joint development program to provide $38 billion in lending to the region through 2014.  There will be long-term loans available for both private and public entities.

Still, governments have more reforms to carry out. Explained analysts with Euro-Phoenix Financial Advisers:  “There is a high degree of onus on governments to manage fiscal and monetary policy and obtain confidence of rating agencies.”

Suma Chakrabarti recently made the same point.  More economic reform and regional integration are necessary:  “All countries have realized they need to shift along this curve, the question is how far along they are.”  Attracting more foreign investment will require having “that debate of how we change the political system.”

Europe’s economic travails obviously present a significant challenge to the region.  But the future of the countries of Central and Eastern Europe remains largely in their hands.  They can continue to remake their economies and expand their connections abroad.  If they do so, their long-term economic prospects will remain bright.