The EBRD’s Deconstructed Deleveraging Design

Along with its annual Transition Report, the EBRD with a new president drawn from the British civil service circulated a bank Deleveraging Monitor under the auspices of the Vienna Initiative which showed marginal quarterly improvement in the size of cross-border Central, Eastern and Sothern European withdrawal to 0.8 percent of GDP. Since 2011 the cumulative drawdown has been 4 percent of GDP, with Hungary and Slovenia worst hit at 10-15 percent followed by Bulgaria, Croatia, Lithuania and Serbia at 5-10 percent. The organization noted that the ECB’s bond-buying announcement eased lending conditions with demand and supply still subdued. Through mid-year business and household credit growth was barely positive even though domestic deposits were up in many countries in line with parent group strategy to boost subsidiary self-reliance. The eight institutions surveyed with 40 percent of regional assets are “becoming more selective” in individual markets through a wide range of economic and industry considerations including local and EU regulation. A chapter in the Transition publication elaborates the theme of pan-European architecture and proposed banking union in particular from emerging member perspectives. It stipulates initial lessons from the 2008-09 crisis against outside foreign control when tied to external funding, but cites the difficulty of mobilizing internal resources with macroeconomic and capital market gaps. On supervision the home-host country split has been problematic as shown by the early example during the Baltic boom when Estonian officials unsuccessfully asked Swedish counterparts for stricter prudential standards. Bulgaria, Croatia and Latvia with euro-pegged exchange rates tried cooling measures on their own without coordination. The European Banking Agency was created as a joint forum but still relies on voluntary understanding between national authorities from basic norms to resolution cases. It will now feature in the single supervisory mechanism outlined in June which puts the ECB in the lead under a common framework but leaves intervention a local responsibility.

The current blueprint in the absence of supranational oversight could be improved to better reflect Emerging European preferences, the document believes. Sub-regional arrangements such as a Baltic-Nordic group could facilitate practical dialogue and policy processes. An ECB “prudential council” should be formed with smaller country participation and financial sector tax, housing and other practices should remain nationally-determined. As a fiscal backstop through the ESM takes shape non-Eurozone members would not be eligible for recapitalization help to their competitive disadvantage. These “outs” should be able to join the treaty even without a roadmap to enter the single currency. More broadly “associate” status could be available in the union setup within a gamut of information-sharing and liquidity support possibilities. These partial adherents could decide to impose tougher countercyclical credit limits and delegate multinational group oversight to the continental body in view of wrenching administrative and capacity constraints.