The Credit Boom in the EU New Member States: Bad Luck or Bad Policies?

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.In the past decade, most of the EU New Member States experienced a severe credit-boom bust cycle. This paper argues that the credit boom-bust cycle was to a large extent the result of factors external to the region ("bad luck"). Rapid credit growth followed from a high liquidity in global markets and the particular attractiveness of "new Europe" for capital flows, while the end of the credit cycle was brought about by a global crisis. However, the fact that some countries managed to avoid most of the excesses, including asset price bubbles and foreign exchange lending, suggests that policies and policy failures ("bad policies")-in particular overly expansionary macroeconomic settings and excessively optimistic views on prudential risks-also have played a critical role.

Foreign Banks in Central and Eastern Europe: The Good, the Bad and the Ugly

“…As the global risk aversion exploded and the interbank markets dried up after the Lehman Brothers' collapse, cross-border bank claims from Western European banks to their CEE subsidiaries dropped (Allen et al, 2011;Brunnermeier et al, 2012;De Haas and Van Lelyveld, 2014), leading to a contraction in domestic demand and economic growth. The CEE countries were hit harder than other regions in the world (Montoro and Rojas-Suarez, 2012;Klingen, 2013), especially countries with the largest pre-crisis macroeconomic imbalances (Becker et al, 2010;Bakker and Gulde, 2010). These were the bad times related to foreign-owned banks in the CEE region.…”