Debt Hangover: Nonperforming Loans in Europe’s Emerging Economies

Authors: Christoph Rosenberg & Christoph Klingen  ·  March 29th, 2012  ·  RGE EconoMonitor

Some hangovers take more than a good night’s sleep to get over. It’s been three years since the global economic crisis put an abrupt end to emerging Europe’s credit boom, but neither lenders nor borrowers are in much of a party mood. One key reason: many of the loans so readily dished out before the crisis have now gone sour.

Festering bad loans are a problem on many fronts:  banks, credit supply, economic growth, and people all suffer. Take Japan’s lost decade. There too, a credit boom ended in tears, new lending subsequently went from too much to too little, and a vicious cycle of credit squeeze, declining asset and collateral values, and economic paralysis followed.

In emerging Europe, the share of loans classified as nonperforming—many of them household mortgages—have exploded from 3 percent before the crisis to 13 percent at the peak. As can be seen in the chart below, levels in some parts of the Baltics and Balkans are already at par with previous financial crises elsewhere.

Tackling bad loans

Nobody wants this dire script to replay in emerging Europe. Policymakers, bankers, and international financial institutions therefore got together under the Vienna Initiative to identify ways to tackle nonperforming loans. A working group co-chaired by the IMF and World Bank just presented a report that analyzes the problem and offers a way out.

Our analysis finds evidence that nonperforming loans are indeed a serious drag on credit supply and economic growth. They drive up banks’ funding costs and interest margins, and at the same time drain their profits and capital. On the credit demand side, over-extended households and businesses are reluctant to consume and invest.

But can banks afford aggressive loan resolution, and would higher credit growth even be desirable in a region that just went through a massive credit bubble? The analysis provides comfort on both fronts: even if nonperforming loan resolution brought new losses to the fore, financial stability would not be undermined.  And despite the credit boom, the private sector’s debt-to-GDP ratio is still low in most countries, so a resumption of credit growth wouldn’t be a problem.

Europe warned crisis not over yet

Date: 31-03-2012
Source: The Financial Times

European finance ministers were warned on Friday that the underlying causes of the continent’s debt and banking crisis had yet to be resolved, as Spain, struggling to rein in its fiscal deficit, published its most austere budget since democracy returned after the Franco era.

Two confidential analyses prepared by European Union officials and distributed to ministers meeting in Copenhagen said €1tn in cheap loans to banks provided since December by the European Central Bank had provided a reprieve, but sovereigns and financial institutions needed to use the relative calm to shore up finances and balance sheets.

“Contagion may … re-emerge at very short notice, as demonstrated only a few days ago, and re-launch the potentially perverse triangle between sovereign, bank funding risk and growth,” one of the analyses, prepared by the EU’s economic and finance committee and seen by the Financial Times, said. The existence of the documents was first reported by the Italian daily La Stampa.

Dying for Satisfaction: Being Happy with Your Doctor Is Bad for Your Health

Author: Yves Smith  ·  March 30th, 2012  ·  RGE EconoMonitor

There is an important study in the Archives for Internal Medicine last month, which escalates an ongoing row as to whether patient satisfaction is in any way correlated with positive medical outcomes. The answer is yes, and the correlation is negative.This finding is of critical importance, not just in understanding why American medicine is a hopeless, costly mess, but also as a window into how easy it is for buyers of complex services to be hoodwinked by their servicer provider, whether via the provider being incorrectly confident about his ability to do a good job or having nefarious intent. Let’s deal with health care case first. The study in question was large scale, of 52,000 patients from 2000 to 2007. This summary comes from the Emergency Physiciansblog (hat tip Julie W):

Results of the study showed that patients who had the highest satisfaction ratings spent 9% more on health care and prescription medications than did patients who had the lowest satisfaction ratings. In addition, the most satisfied patients had a 26% greater risk of death compared to least satisfied patients.