Boom, boom, boom, let’s go back to…

RIGA - East European governments must improve bank supervision and cut spending to prevent another credit boom as the region emerges from the global financial crisis, the International Monetary Fund said.
“It’s important to prevent the re-emergence of credit booms,” Bas Bakker, head of the IMF’s Emerging Europe division, said yesterday in an interview in Vienna.
“The countries that had the biggest boom in pre-crisis years” are the ones that now “see the most sluggish recovery,” he said.

The former communist countries in Europe and central Asia are recovering from their deepest recessions since switching to free-market policies two decades ago. Cheap credit helped growth average 5 percent annually in the boom years. By August 2010, the IMF had provided 70.7 billion dollars of loans to the region, making it the largest recipient of bailouts.

Policies that may help prevent credit bubbles include better bank supervision, including oversight by the home countries of foreign banks active in the region, curtailing loans in foreign currencies, reduced government spending during good times, and macroeconomic policies that allow interest rates to stay low, Bakker said.

Economic growth across the region should average 3.9 percent this year and 3.8 percent in 2011 after gross domestic product shrank 6 percent in 2009, the IMF said yesterday in its regional outlook. Romania, Croatia, Montenegro and Latvia will contract this year, and Bulgaria will stagnate. All the countries will return to growth in 2011, the forecast showed.
Export-Led Recovery

Rising exports to Western Europe, the main market for the region’s goods, is driving the expansion. High unemployment, falling wages and a dearth of credit has held back domestic demand in several of the countries, Bakker said.
Rising bad debts, high funding costs and weak consumer confidence have held back bank lending in the region, Bakker said. In Ukraine, Romania, Serbia, Latvia and Lithuania, more than 15 percent of all loans were non-performing at the end of last year, according to the IMF.

“Credit growth needs to be revived,” he said. “Without credit growth, domestic demand is likely to stay weak and the recovery is going to remain weak.”
Bakker said he expects the rise in bad loans to peak soon.

“Most of emerging Europe is now starting to pick up” and non-performing loans “are either close to peaking or they probably will peak in 2011,” he said. “In countries where growth is still negative, it may take a little longer.”