(CentralBankNews.com, 2.3.2009)
Miroslav Singer, a vice governor at the Czech National Bank, tells CentralBankNews.com why the media’s recent treatment of the problems in central and eastern Europe bears scant resemblance to the reality in some countries in the region.
The myriad articles on the problems in central and eastern European economies suffer two major shortcomings: an insufficient acknowledgment of the wide differences between these economies and a misinterpretation of the Bank for International Settlements’ (BIS) cross-border banking data. Both shortcomings mislead readers into believing that the economies are in much worse trouble than they really are.
Let us take, for instance, the case of the Czech Republic.
Naturally, the very-open Czech economy, where exports account for almost 80% of GDP, has been hit hard by falling demand in its main markets. But it entered the crisis in good shape.
External flows were close to equilibrium, with a foreign-trade surplus and a negligible current-account deficit. We were at the peak of the business cycle, leaving considerable space for a deflationary slowdown. And we held a reasonable fiscal position, with a deficit of about 1%, coupled with quite a low public sector debt of around 30%, thereby allowing automatic stabilizers to play a significant role. All this was matched by a very conservative financial-sector balance sheet.
Outside the financial sector, foreign-currency loans account for just 0.1% of loans to Czech households. Loans are, anyway, very low by any standards, totaling 25% of GDP or 30% of households’ financial assets. Czech households’ conservative behavior is a direct consequence of the fact that Czech koruna interest rates have been mostly below euro ones in recent years and that Czech-koruna-denominated mortgage loans have been the least expensive in the European Union (EU). Although Czech banks are mostly owned by European groups, they have never needed credit from abroad, since they have financed their loans from domestic deposits. The loan-to-deposit ratio of the Czech banking sector is now 77%, among the lowest in the EU, and Czech banks are mostly net creditors of the European groups they belong to.
The Czech banking sector is one of the few that has required no taxpayer assistance, and the Czech National Bank still only accepts Czech state paper as collateral. So, I dare conclude that the Czech economy is very well equipped to deal with crisis by comparison with other central and eastern European countries and even with many of the so-called “old” EU states.
Several articles based on BIS tables have said that the exposure of foreign banks in the Czech banking sector stands $192 billion - over 80% of GDP. This grossly overestimates the problem.
The figures stem from the treatment of the banking sector’s entire balance sheet as being financed by parent banks. The $192 billion figure corresponds roughly to the sum of the balance sheets of Czech banks owned by foreign banks on the given date. As most domestic banks are foreign owned, this figure in fact represents almost the whole balance sheet of the Czech banking sector. Of course, the volume of loans provided is smaller than the banks’ balance sheet. Czech National Bank data show total household and corporate borrowing from banks was around Kc1.6 trillion ($70.6 billion) on the same date, the overwhelming majority of which, however, was borrowed in Czech korunas. Although the lenders are foreign-owned banks, they operate under the Czech Banking Act and are supervised by the Czech banking supervisor. So even this lower number represents the volume of loans provided by Czech banks to Czech economic agents, mostly denominated in Czech koruna and financed by deposits in the same currency. As such, the bulk of these loans do not pose any cross-border foreign-exchange or financing risk. In fact, the Czech Republic’s debt vis-à-vis foreign banks is $38 billion.
When discussing the troubles in central and eastern Europe, it is thus important – as in any analytical article – to carefully distinguish between economies and treat data carefully. The Czech National Bank is well equipped (both financially and institutionally) to deal with abrupt changes in investor sentiment. It is investors themselves who will ultimately suffer as a consequence of such shortcomings.