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EU New Members Enter Soap Bubble
Growth in credit financing of private sector in Eastern Europe begins making investors and economic authorities concerned, says the special supplement to World Bank’s periodic report devoted to the economy of EU new member states (EU8+2). In the last decade, the amount of bank credits to private sector grew drastically (see graph) in most countries of the region. Thus, in Estonia it grew from 14 percent of GDP in 1995 to 74.3 percent of GDP in 2005. Even in Romania, it nearly doubled – up to 21.1 percent of GDP. In Russia, it was 24.5 percent of GDP in 2004, according to World Development Indicators.
Until recently, growth in credit financing in Eastern Europe was regarded only as a good sign of improvement in investment climate. Indeed, the ratio of credit to GDP in EU new member states is still significantly lower than in EU old members. Thus, in the Netherlands and in Denmark it is about 180 percent, in Great Britain and Ireland – about 170 percent. Only in Belgium and Finland it is lower than 80 percent. In other words, the rapid growth in bank crediting was regarded as a sign of convergence of economic structures of ‘old’ and ‘new’ Europe.
However, World Bank’s report shows that in a number of EU8+2 countries the growth in crediting might turn out to be excessively rapid. It might cause disbalance and potential crisis threat. The report names Baltic states – Estonia, Latvia, and Lithuania – as especially endangered.
Real estate mortgage in the EU is a very illustrative example. The growth in crediting of real estate purchases considerably exceeded the supply of new apartments. As the result of disbalance between supply and demand, prices on housing grow rapidly, creating opportunities for the appearance of a ‘soap bubble’ at real estate market. Here is the only time where Russia is mentioned in the report: Russian investors into Baltic real estate additionally heated up the market. Accommodation supply in Russia grows even slower.
www.kommersant.com
All the Article in Russian as of Jan. 30, 2007
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