By Ajai Chopra
Europe’s economic and financial integration has been a tremendous success, but the region is now under great stress. As the global economic crisis has shown, the flipside of Europe’s successful integration has been a synchronized economic downturn and complex financial spillovers between countries.
For those of us involved in providing financing and policy advice to emerging Europe, it quickly became apparent that the official sector would be more effective if it managed to secure the cooperation of private western banks operating in emerging market countries in central, eastern, and southern Europe (CESE).
During the past decade, western banks played an important role in developing the financial sector in emerging Europe, through ownership of banks and through direct cross-border lending to financial institutions and firms. But over time, CESE countries accumulated high levels of debt to western banks. Although these banks have a declared long-term interest in the region, they came under intense pressure to deleverage when the global financial crisis struck because of the weak financial conditions in both home and host countries and the diminishing appetite for risk at the global level. Uncertainty about other banks’ strategies further exacerbated the pressure on individual banks to scale back lending to the region.