In the Wake of the Crisis: Dealing with Distressed Debt Across the Transition Region
Ralph De Haas
European Bank for Reconstruction and Development
European Bank for Reconstruction and Development (EBRD)
European Bank for Reconstruction and Development (EBRD) Working Paper No. 112
This article reviews the origin and spread of the distressed debt problem in the transition region. We argue that while the crisis was triggered abroad, the current high level of distressed debt in various transition countries mainly reflects home-grown vulnerabilities. As in the West, the root causes of the debt problem were abundant and cheap funding and a gradual relaxation of banks’ lending standards – in particular an excessive reliance on rising real estate values. We document a strong positive relationship between pre-crisis house price increases, house price collapses during the crisis and subsequent increases in non-performing loans (NPLs). Policy options to deal with distressed debt range from decentralised approaches in which banks restructure NPLs on a case-by-case basis to more centralised options, such as a “London approach”, bad banks, or asset management companies. Centralised options may be called for if case-by-case debt restructuring is suboptimal from a system-wide perspective because of negative externalities or capacity constraints in either the banking or the judicial system.
Number of Pages in PDF File: 16
Keywords: distressed debt, insolvency, financial crisis
JEL Classification: F34, F36, G21, G28, G33, Kworking papers series
Date posted: January 18, 2011
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