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The contraction of long term finance in emerging Europe

16/10/2013 14:40 (185 Day 14:58 minutes ago)

The FINANCIAL -- The five years since the global financial crisis have seen a drastic shortening in the average maturity of bank credit.

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This contraction in long term finance is often regarded as the main factor behind the fall in corporate investment and infrastructure spending. In the eleven new EU countries of central Europe, for instance, fixed capital formation has fallen from 26 per cent of GDP before the crisis to under 21 per cent in 2012, according to European Bank for Reconstruction and Development.

This component of investment is closely associated with trend growth over the medium term, underlining that the present contraction will have lasting effects within the region. Yet, as in many areas in economics, causation could run either way. Sorting out the relevant factors is a key policy issue, occupying no less than the G20, and is a priority as the EU considers various new policy instruments to address the shortfall.

Data on the maturity composition of bank lending for most of the new EU countries in central and south-eastern Europe indeed show that term funding has disproportionately suffered amidst the present credit stagnation, according to European Bank for Reconstruction and Development.

In Hungary last year’s contraction of about 10.5 per cent in lending to non-financial companies was primarily in the segment of long term loans which contracted by almost 16 per cent over a year earlier (Figure 1a). Even in countries where credit growth remained marginally positive, as in Romania, growth in maturities above one year has been negligible.

Regulators within EBRD countries of operation will typically attribute the decline in long term credit to the deleveraging by European banks which dominate local financial markets. European cross-border banks can fund their subsidiaries in the more developed capital markets of their home countries, and contributed to a lengthening of maturities in host countries over the period of large funding inflows prior to 2008, according to European Bank for Reconstruction and Development.

Since then this process appears to have gone into reverse. Figure 2 charts the proportion of cross-border claims to the 11 new EU members in central Europe (including Croatia) at maturities in excess of 2 years. Following a rapid increase up to 2009 this ratio has since declined markedly, as banks appear to have let their longer-term exposures run off – in direct lending, though also in funding to their subsidiaries. A similar picture emerges from the syndicated lending by European banks within the EBRD countries of operation. Between 2008 and 2012 the share of loans in excess of 5 year maturities declined from 32 to 24 per cent.

 

 

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