Emerging Europe’s Deleveraging Dilemma

Since 2011, the eurozone-based parent banks that dominate emerging Europe’s banking sector have been under pressure to deleverage – with potentially serious consequences for a fragile region. By ensuring orderly deleveraging, multilateral lenders and private banks can help to put emerging Europe on a more sustainable growth path.

LONDON – Serbia’s Tigar Corporation, a privatized automobile tire and tube maker, was a poster child for corporate makeovers in transition economies. Then eurozone deleveraging kicked in, and now the child in the poster is in serious trouble.

When Tigar sold its tire division to France’s Michelin, it invested the entire proceeds in new businesses. Perhaps capital expenditures were overly ambitious, but they triggered rapid export growth, and more than 2,000 jobs were created in the small town of Pirot to manufacture boots for European fishermen and New York City firemen, as well as technical rubber products. Expansion was, for lack of other options, financed largely through short-term loans.

Many banks in Serbia and other transition countries in Europe rely heavily on funding from their eurozone parent institutions. But, 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.

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