Page 68 - Accelerating out of the Great Recession

THE NEW REALITIES

In addition to traditional protectionism, which applies to the
flow of goods, companies are being confronted by new forms of
protectionism that apply to financial services. The high-growth
years were associated with a significant increase in cross-border
lending. According to the Bank for International Settlements
(BIS), cross-border loans now represent nearly 50 percent of all
loans (up from just over 20 percent in 1995). With so many
banks under pressure and requiring government support, it is
not surprising that governments (and public opinion) are start-
ing to put pressure on banks to stop lending outside their home
market. In Greece, for example, the government insisted that
the €28 billion support package for Greek banks should not be
used to support their Balkan subsidiaries.
Elsewhere in Europe, companies are complaining about the
significant pullback of U.K. banks from international lending,
whereas in the United Kingdom, companies are seeing similar
behavior from foreign banks. In the first quarter of 2009, BIS
reported that external claims of all BIS-reporting international
banks fell by 2.3 percent. Some 80 percent of this decline was
accounted for by a reduction in international lending to other banks.
Given the scale of cross-border lending over the past few years,
this systematic retrenchment will have a profound long-term
effect. In Central and Eastern Europe, where so many banks are
in foreign ownership, the fallout is already visible. The contraction
in lending capacity amplifies the deep problems there (especially
given the high share of foreign currency–denominated debt),
which potentially could trigger a crisis across the region that could
be bigger than the Asian crisis at the end of the 1990s. In other
countries, reduced access to funds will exacerbate the credit
crunch, deepen the recession, and be a drag on long-term growth.

■ 47 ■