The Economic Premise series summarizes good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank.
Just before the 2008-9 global financial
crises, policy makers were concerned about the rapid growth
of bank credit, particularly in Europe; now, worry centers
on a potential global credit crunch led by European banking
institutions. While recognizing that concrete evidence is
limited by significant data gaps and lags, this note
discusses the dynamics of European bank deleveraging and
possible implications for emerging market economies (EMEs).
Overall, the information available as of early 2012 shows a
marked deterioration of credit conditions across Europe.
Data also suggest that spillover effects are already being
felt around the globe and imply significant channels through
which deleveraging could have disruptive short and long-term
consequences for credit conditions in EMEs, particularly in
Central and Eastern Europe (CEE). However, the significant
liquidity support provided by the European Central Bank
(ECB) since December may be a 'game changer,' at
least in the short term, because it has helped revive
markets and limited the risk of disorderly deleveraging. The
extent, speed, and impact of European bank deleveraging will
henceforth depend largely on the evolution of market
conditions, which in turn are guided by the ultimate impact
of ECB liquidity support, attainment of sovereign debt
sustainability and fiscal convergence within the euro zone,
and credibility of the European rescue fund as an effective
firewall against contagion.