Western European Banks' Exposure to Eastern Europe

This article is a translation of an article on my Swedish language blog.

Last week I wrote about Eastern Europe's loans from Western European Banks (in Swedish). Now I've taken the latest figures from BIS and made graphs to illustrate how the situation is. Please note that the figures are only for claims from banks. There may be other lenders too, but it's not as easy to find statistics for them.

First I'll present an illustration of which Eastern European countries have borrowed most. The colours indicate which in Western European countries the they have borrowed from belong. Click the graph for a sharper version.This graph shows clearly that we don't need to worry too much about Western Europe's banks if Macedonia, Moldova, Montenegro, Belarus, Albania, Bosnia or Serbia should be hit by a collapse of the economy and currency, since their loan volumes are relatively small. The other countries, however, are potential threats to Western Europe's banks. This becomes especially clear when one Western European country has a large proportion of the lending to a certain Eastern European country, e.g. Sweden to Estonia, Latvia and Lithuania.

Huge figures have been floating around when it comes to the exposure of Western European banks to Eastern Europe, but the total sum of bank lending is "only" slightly more than 1.4 trillion dollars, which should be quite close to the actual figure. This is still, however, a very large figure.

Now I'm going to look at it from "the other side", i.e. divided per lender country instead.Here you can see that Austria is at the top of the risk list for lending to Eastern Europe. As for Sweden we can note that the major part of the lending is to the three Baltic states. Since these three economies risk following each other, Sweden is much more exposed to a single risk factor.

However, absolute numbers don't often say that much. If Italy lends a bit over 200 billion dollars that's a larger share of the country's GDP than if Germany lends the same amount. So below I compare the banks' lending to Eastern Europe to the GDP of the countries (taken from the 2008 GDP estimates from the CIA Factbook).Then you suddenly see what a huge risk Austria is taking! Their banks have lent roughly 64% of the country's GDP just to Eastern Europe! Even a mild crisis in Eastern Europe would thus probably suffice to topple Austria's banks - we don't even need a serious crisis. The biggest Austrian claims are on Czechia, Romania and Hungary. At least Romania and Hungary are already on the problem radar...

By Austrian measures the other Western European countries have taken limited risks towards Eastern Europe, even if they definitely aren't negligible. Belgium's banks have lent about 25% of Belgium's GDP to Eastern Europe, and Swedish banks about 20% of our GDP, most of it to Estonia, Latvia and Lithuania.

Let us also take a look at which Eastern European countries have borrowed the most in relation to their GDP, and thus have taken a large risk. This is according to my usual identification mechanism for potential problems in this crisis. Large loans = large problem risk.Here you can see that Croatia and Estonia are in a risk class of their own. Their claims from foreign banks are more than 120% of their GDP. But Latvia, Hungary, Czechia, Slovakia, Lithuania and Bulgaria are also risk factors that cannot be ignored (the nominal sum of their borrowing according to the first graph in this article also plays a part here). Add to this the fact that GDP for many Eastern European countries is now falling rapidly, and we will quickly get even bigger loans-to-gdp ratios.

Part of the risk is also the currency risk. A large part of the loans from Western to Eastern Europe are denominated in euros or Swiss francs. This causes payment difficulties when the local currency sinks against the euro and/or the franc. Unfortunately I don't have any figures for how much of the loans are denominated in foreign currencies, but we can take a look at how some currencies have moved against the euro since the end of August last year.Here you can see that Ukraine's hryvnia and Poland's zloty have fared worst. We have all heard about Ukraine's problems, but there has not been much mention of Poland during this crisis. Hungary, Romania, Russia and Czechia have also been hit by falling currencies, though not as badly.

To conclude, we can see that the banks of several Western European countries have taken large risks towards the now faltering economies of Eastern Europe. There is an immediate risk that for example a currncy and/or economic collapse in one of the risk countries I've presented above could topple e.g. Austria's banks. This in turn would probably give serious repercussions for the whole euro area (Austria is part of it). As I see it it is only a matter of time before something drastic happens. Exactly what will happen is hard to predict, but Sweden is definitely also in the risk zone.

In this context it is interesting to note that the bank crisis of 1931 had its origins in Austria, where their then largest bank Creditanstalt went bankrupt in May of that year. Will we get a replay?

P.S. I recommend the following two articles by Ambrose Evans-Pritchard at the Telegraph for those who want to read more about the risks from Eastern Europe:
Failure to save East Europe will lead to worldwide meltdown
Eastern European currencies crumble as fears of debt crisis grow


  1. Very useful info for me. and I think where there is risk that makes investors fear, where these is huge opp. -- A stock investor recently moved to stockholm from Kina.

  2. the Creditanstalt crisis was a different matter and had much to do with the bad economic conditions of the Austrian economy in the 20ies.
    now Austria is much more stable than in that times

  3. Which data do you use for foreign claims? e.g. figures for foreign claims as % GDP do not seem to match with the gross external debt positions reported by worldbank/BIS: example croatia, where external debt is somewhere arround 90% of GDP as of YE 2008 and not above 120% as shown by you or also Latvia for which you show < 100%, while according to WB/BIS it should be >120%.

  4. Anonymous 12:20,
    I didn't mean that things will play out exactly like when Creditanstalt went down. What I meant is that this time around it might be Austria that again triggers a global bank blowout of some kind.
    Is the Austrian economy really that stable? Lending 60% of the country's GDP to Eastern Europe does not create economical stability.

  5. Anonymous 15:36,
    The figures I use for foreign claims are from BIS: http://www.bis.org/statistics/consstats.htm
    The figures for GDP were the preliminary figures for 2008 from the CIA factbook.
    You just give percentages. What figures do you have for Latvia's and Croatia's GDP.
    If you contact me at "flutethoughts at gmail dot com" we can perhaps sort the figures out.

  6. What you overlook is the fact that Austria's does not lend its own savings to CEE but lending in CEE is generated for the most part by savings in CEE. The overall exposure of equity and direct intercompany loans is much, much smaller. There is no guarantee by the mother banks for any of its daughter banks either.

    The doomsayers of the anglosaxan financial community put the worst imaginable loss for Austrian banks in CEE at around EUR 30 bn - even if the state would have to swallow this up Austrian debt to GDP would only increase to slightly above 70%, which is hardly a scary number.

  7. Just discovered these great charts - thanks!

  8. Very helpful, do you have the breakdown of which Western European banks are most exposed? Not just the country but specific banks. Thanks