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Nowotny: Must Avoid Bubble in CESEE

Published: November 19, 2013; 06:51 · (Vindobona)

In order to avoid another asset bubble like in 2008, loan growth has to be monitored, governor of Austrian National Bank Ewald Nowotny says.

Nowotny: Must Avoid Bubble in CESEE / Picture: © Flickr

ECB Governing Council member Nowotny indicates that the CESEE region is still vulnerable to asset bubbles.

In the year before 2008, foreign banks pursued an aggressive lending policy. The markets began to overheat as the inflow of foreign capital was mainly used for consumption purposes. After 2008, the non-performing loan ratio grew steadily. In the Southeast European region as a whole the share of non-performing loans comes was up to 16 percent. In Romania, Bulgaria, Serbia, Croatia and Slovenia, the NPL quota is significantly above the CESEE average. T-he banking industries in Poland, the Czech Republic, Russia and Slovakia, by contrast, are more stable. In these countries, the NPL quota is about 5%.

According to Nowotny, it was difficult to tell whether the CESEE countries were overheating or converging with Western Europe. In future, however, such scenarios must be prevented, Nowotny stressed. Although, the medium-term perspective for the CESEE region is still a catching-up process, regulators must be more careful than in the past. “There is still enough room for loan growth. However, there are some countries where we see a very high growth of demand.”

Due to the high non-performing loan quota and the deleveraging of Western banks, the countries of Central, Eastern and Southeastern Europe are still far from financial stability, the IMF stated recently. Since the beginning of the financial crisis in 2008, the West European banks have been reducing their exposure by approximately 20%.

Despite the improving economic frame conditions, the CESEE region is still highly susceptible to external shocks and dependent on foreign sentiments. In particular, Southeastern Europe did not establish a sustainable growth model after 2008.