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# **Banks as Enterprise Restructurers**

It is still too early to evaluate outcomes, but there are several reasons for believing that the banks will not be able to carry out fully the role assigned in enterprise restructuring. Information on enterprise viability is still not very reliable in some countries, both because accounting is poor and because implementation of reforms has varied so widely. Though considerable progress has been made in most CEE countries in price liberalization, relative prices are more distorted in FSU where economies are still unstable and there has been less price and trade liberalization. 14/ Information on firm viability is further clouded by implicit and explicit subsidies. In the first year of reform, it was argued that relative prices and other distortions made it difficult to decide which enterprises should be liquidated and which might eventually become viable. Neither the balance sheet, that is the level of debt, nor the income statement, that is the level of profits, were considered reliable guides to long run viability. Hence govermnents in the first year of reform did little to impose a hard budget constraint; rather they continued to provide enterprises with subsidies. 15/ The budget constraint is much harder today, forced more by macro conditions than govermnent choice. However, there are still distortions that cloud the information on enterprise viability. Widespread enterprise arrears, management fraud that skims off enterprise income, and poorly designed government interventionsl6/ reduce the value of enterprise profitability as an indicator of viability.

Though better positioned than others in terms of information and incentives to make appropriate decisions about the financial futures of enterprises, banks have only limited skills and experience in the workout process. Moreover, few banks in Central and Eastern Europe have yet been privatized and the instructions to public banks have been amnbiguous on whether governments wished public banks to continue to support non-viable enterprises. In some countries banks are clearly not in a strong enough political position to enforce a hard budget constraint on enterprises, to work out a full _141_ The results of several years of adjustment in CEE are visible. Inflation is coming down in the strong reformers, government budget deficits were lower in 1993 than in 1992, and currencies are intemally and externally exchngeable. In the most advanced reformers, such as the Baltic states, the Czech Republic, Poland and Slovenia, the decline in output seems to have stopped, and real wages and unemploymnent stabilized. at least for now.

15/ Fan and Schaffer found that explicit subsidies amounted to about 25% of GDP in Russia in 1992, with only about one-third of these subsidies appearing in the government budget. Q. Fan, M.E. Schaffer, "Government Financial Transfers and Enterprise Adjustment in Russia, with Comnparisons to Central and Eastem Europe." Mimeo. World Bank. 1994, p.54.

16/ Some form of social safety net for the unemployed is clearly needed. Unfortunately, that support has sometimes been of a kind to distort the information on sector and enterprise viability.