Voluntary private sector involvement and the financial crisis in emerging Europe

Abstract

In 2009, as part of the European Bank Coordination Initiative (also known as the Vienna Initiative (VI)), foreign banks with significant interests in emerging Europe signed voluntary commitment letters to maintain exposure to five countries as long as their International Monetary Fund/European Union (IMF/EU) stabilization programmes remained on track. Using panel regressions based on international bank lending data for 19 emerging European states for 2000–2010, this article shows that countries with Stand-by Arrangements with the IMF attracted less foreign bank lending than justified by fundamentals. However, countries that obtained official financing and participated in the VI did not experience the decline in foreign private loans associated with IMF programmes.

Keywords:

• private sector involvement
• catalytic official finance
• financial crisis
• Vienna Initiative

JEL Classification:

• F33
• F34
• O16

Acknowledgements

Research assistance by Richard Loeser is gratefully acknowledged.

Notes

The views expressed here are those of the author and do not necessarily reflect those of the ECB.

¹ The countries are Albania, Bulgaria, Belarus, Czech Republic, Estonia, Croatia, Hungary, Lithuania, Latvia, Moldova, FYR Macedonia, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Turkey and Ukraine. Owing to lack of data, Bosnia and Herzegovina and Montenegro are excluded.

² IFI stands for International Financial Institutions.

³ The Joint IFI Action Plan provided financial assistance directly to banks in all countries in Central and Eastern Europe. Hence, the focus of Cetorelli and Goldberg (2011) is not the impact of private sector involvement in the resolution of the crises in countries with IMF programmes, which is the objective of this article.

⁴ S&P 500 Volatility Index (VIX) of the Chicago Board Options Exchange.

⁵ Another reason may be that investors interpreted the European Central Bank's interest rate cuts as a signal of worsening financial market conditions and deleveraged further.

⁶ The results are similar when the IMF programme dummy is lagged.

⁷ A Wald test also confirms that the sum of the coefficients on the Vienna Initiative (VI) dummy and the IMF dummy is not statistically different from zero, that is, the VI entirely offset the negative effect of IMF financing.