Indebtedness in Central and Eastern Europe – Eight years of new EU members

Abstract

The pre-crisis growth of Central and Eastern Europe was based on significant external fundraising. The gross external debt of the 11 new Member States last year reached 80 per cent of the GDP, doubling in the course of eight years. The reason for the indebtedness in Baltic and South-East Member States was the foreign trade balance deficit, while in Central European countries the deficit of the current account balance due to capital gains. This indebtedness was in great part the result of private sector borrowing, made up of one third bank loans, and two thirds cross-border loans of companies. Half of the external indebtedness of the corporate sector was related to the inflow of operating capital. A trend-like relation may be observed between the volume of cross-border loans and the volume of foreign capital influx. The indebtedness of the state was only strong in Hungary, though in the spirit of anti-cyclical fiscal policy, the level of public debt did increase in the majority of countries. Caution must be taken – due to the demand decreasing recession effect – during the deleveraging process.