Who wants to converge with western Europe? Greek sovereign finances are threatening eurozone cohesion, a euro-denominated credit boom in central and eastern Europe (CEE) spiralled out of control, protests on the streets have brought down several CEE governments. Transitional Europe has lost faith in transition, say doom-mongers.
But the facts do not fit the gloomy story, and we should be wary of learning the wrong lessons. Yes, nearly 20 banks in Ukraine have entered administration, along with three defaults in Kazakhstan and another half-dozen rescue efforts in Russia. But the surge in retail credit during the boom years, characterised as too far too fast, does not appear to be the cause of any catastrophe.
Aside from a blip in the Baltics, the region's retail bankers adhered to underwriting standards far tougher than in most developed markets. Mortgage collateral valuations were made with a significant
discount to the purchase price of the property. This is not the stuff of subprime lending. And it has allowed millions of borrowers to unlock home equity or finance their own start-ups, for the first time ever in many of these countries.
The convergence remedy
There are undoubtedly problems, but convergence is the cure, not the cause. In short, the shortcomings are in governance and governments. If Ukraine suffered more than most, it did so partly because the economy was made a political football. The government would not take responsibility for repairing the budget (in contrast to Greece), and one troubled bank appeared to be refused a bail-out because of political rivalry between its owner and the then ruling party.
In terms of governance, a recent Moody's report pointed out that most bank failures in the region are caused not by bad retail loans, but rather by the loans to parties related to controlling shareholders. This is old-style, pre-convergence name-lending. And the good news is that governments are becoming less tolerant of it.
Russia is finally tightening capital requirements to squeeze out phoney banks, and both Russia and Kazakhstan are pushing for greater transparency in bank ownership and tighter regulation of lending to offshore entities. Croatia is investigating alleged political machinations behind bad lending decisions. Look beyond the rhetoric from the CEE region criticising Western financial excesses. The long-standing message from multilaterals that transparency is a valuable part of transition seems to be getting through.
