# **Table 9 (cont.). Cost of Bank Restructuring for the Government (1991-98)**

|||**(perc**|**ent of G**|**DP)**||||||
|---|---|---|---|---|---|---|---|---|---|
||**1991**|**1992**|**1993**|**1994**|**1995**|**1996**|**1997**|**1998**|**Total"**|
|**Georgia**||||||||||
|Bank liabilities to government<br>written-off|0.0|0.0|0.0|0.0|0.0|0.0|0.0|0.1|0.1|
|Assumption of enterprise debt|0.0|0.0|0.0|0.0|0.0|0.0|0.0|0.04|0.0|
|<br>**Total**||||||||||
|**Kazakhstan**||||||||||
|Assumption of enterprise debt|0.0|0.0|0.0|0.0|11.0|0.0|0.0|0.0|17.6|
|<br>Recapitalization of banks|0.0|0.0|0.0|0.0|0.0|0.1|0.4|0.0|**0.8**|
|<br>**Total**|||||||||**18**|
|**Kvrevz Republic**||||||||||
|Bonds issued|0.0|0.0|0.0|0.0|0.1|4.3|0.7|0.0|4.4|
|o/w placed in Central Bank|0.0|0.0|0.0|0.0|0.0|4.3|0.0|0.0|3.3|
|Interest payments|0.0|0.0|0.0|0.0|0.0|0.2|_0.3_|0.3||
|<br>o/w to Central Bank|0.0|0.0|0.0|0.0|0.0|0.1|0.2|0.1||
|**Total**|||||||||**_4.4_**|
|**Ukraine**|0.0|0.0|0.0|0.0|0.0|0.0|0.0|0.0|**0O.**|

**i/** Total Cost is the net present value (NPV) at end- 1998 of the annual costs during 1991-98. The NPV is calculated using the relevant interest rate for each cost item.

2/ Assistance to the banking sector provided by the National Property Fund and various asset management companies, financed by the government, the Central Bank and the National Property Fund.

3/ Portion related to central bank losses on loans to troubled banks.

To understand how these costs were generated, it is useful to draw some distinctions between the different country groups, as follows.

# **a.** _Bulgaria, Czech Republic, Hungary_ **_and_** _Poland_

In the _CEEs_ (with the exception of _Macedonia),_ banks were restructured to deal with inherited bad loans, done commonly through recapitalization of troubled banks with government bonds often in exchange for bad loans. In general, the cost of this assistance was extremely high"<sup>7</sup> , for two reasons. First, the amount of non-performing loans inherited from the Socialist system was large. For example, in _Bulgaria_ it was nearly 54 percent of total loans and in the _Czech Republic_ approximately 50-66 percent. Second, the costs were high because the restructuring operations undertaken by the government in most of these countries suffered from several weaknesses which raised fiscal costs, as discussed below.

The financial restructuring programs did not provide adequate recapitalization from the start. Undercapitalized banks face distorted incentives in granting new credit, which created moral hazard resulting in excessive risk taking (Begg and Portes, 1993). This led to recurrent banking crises and successive rounds of recapitalization, raising fiscal costs even further. For example, in _Hungary,_ the first plan (the Loan Consolidation Program, LCP) introduced by the government in 1992-93 to deal with outstanding non-performing loans was too small, given the size of the problem. This necessitated a second round of recapitalization in 1993-94 (the Bank-led Restructuring and Loan Consolidation 17 For _Poland_ a large portion of the fiscal cost is due to the fact that the government in 1991 decided to capitalize banks that suffered from foreign exchange losses after the 1989 devaluation. The Treasury issued nearly $ 5.5 bln in dollar denominated bonds (corresponding to 7.3 percent of GDP) for this purpose.

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