Emerging Europe's Deleveraging Dilemma by Erik Berglof and Božidar Đelić - Pr... - 0 views
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emerging europe dilemma erik project syndicate eli
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Expansion was, for lack of other options, financed largely through short-term loans.
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since the onset of the global financial crisis, eurozone-based banks’ subsidiaries in emerging Europe have been reducing their exposure to the region. In 2009-2010, the European Bank Coordination Initiative – known informally as the “Vienna Initiative” – helped to avert a systemic crisis in developing Europe by stopping foreign-owned parent banks from staging a catastrophic stampede to the exits.CommentsView/Create comment on this paragraphBut, in the second half of 2011, the eurozone-based parent banks that dominate emerging Europe’s banking sector came under renewed pressure to deleverage. Many are now radically changing their business models to reduce risk.
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Over the last year, funding corresponding to 4% of the region’s GDP – and, in some countries, as much as 15% of GDP – has been withdrawn. Bank subsidiaries will increasingly have to finance local lending with local deposits and other local funding.
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excessive and chaotic deleveraging by lenders to emerging Europe – and the ensuing credit crunch – would destabilize this economically and institutionally fragile region.
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View/Create comment on this paragraphFor Tigar, deleveraging has meant that banks that had pursued its business only a couple of years ago have suddenly cut lending – even though the company never missed a debt payment. Previous loans came due, while cash-flow needs grew. Despite its good operating margins, growing markets, and prime international clients, the company experienced a drop in liquidity, requiring serious balance-sheet restructuring.
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Indeed, several Western financial groups are considering partial or complete exits from the region – without any clear strategic replacement in sight.