Reporting from the European Bank for Reconstruction and Development, I am struck by how vulnerable Central and Eastern Europe is to a credit meltdown as western European banks ‘deleverage’ and retreat home, very much the issue of the day.
Anaemic consumer growth is being foisted on the region as banks withdraw to their home markets. A series of attempts to stem that retreat, such as Vienna 2.0, are incipient but it’s tough to get agreement between home and host countries.
The experience in Central Europe underscored just what a big role credit and debt have played in growth and the suspicion they now generate. Thoughtful Marek Belka, the Central Bank governor for Poland, declared debt as the key ingredient in economic models is defunct: “The previous model of debt-driven growth is a matter of the past. That is, in my opinion, is the most challenging task we are facing.”
That made me think of Brazil and its ongoing experience pushing credit as a counter-cyclical weapon. While I applaud the government for getting tough with private banks, which enjoy peddling usurious rates, you do have to wonder if stimulating credit is a reasonable solution to Brazil’s slowdown.
Brazil has proven prone to hyper-inflation, has plenty of repressed consumer demand, and very little experience in analysing credit. There are signs that credit is already stretching consumers with higher default levels and overall consumer debt that is expanding too fast, especially when you remember just what a tiny percentage mortgages contribute. It is time the Brazilian government looked to other levers to keep GDP purring.