Risks and uncertainties

Risks to the outlook for the region remain skewed to the downside (see table below).
In the short term, a worsening in financial constraints and commercial bank lending carries a high liquidity risk, which could increase pressures on the balance of payments in several countries.

The rapid expansion of foreign currency borrowing in the years before the crisis means that many such loans could become nonperforming were domestic currencies to depreciate sharply against the currency of the loan.
This in turn could threaten the solvency of banks in ways that have yet to emerge—posing further challenges for policy makers.

The currencies of Russia and Kazakhstan have already depreciated, after initial attempts to defend the exchange rates through massive drawdown on reserves.
Other countries with large current-account and/or government deficits and relatively rigid exchange rate regimes may be at particular risk of such a scenario.

High levels of short-term debt also expose many countries in the region to rollover risk.
So far this risk has not materialized.

But the predominance of foreign-owned banks in Central and Eastern Europe (foreign-owned lenders predominantly headquartered in Austria, Greece, Italy, and Sweden account for 70 percent of local banking assets in several countries)⁸ could expose countries in the region to a sharp reduction in access to foreign capital if parent banks in high-income countries are forced to scale back lending in the region as they seek to bolster their own balance sheets.

⁸ See Global Development Finance 2008, chapter 3.