# **Finding 3.2:  Domestic Exposures**

- <mark>Public debt is still comparatively low in most countries, although Hungary (and possibly</mark> Albania) are important exceptions.

- The rapid growth in private credit poses the risk of non-performing loans in some countries.

- <mark>The sectoral balance sheet data show that households, corporates and banks have increased the size of their balance sheets but these remain relatively small compared to advanced economies.</mark>

# **4. Debt Overhang at the Firm, Household and Bank Level**

# **_4.1 Debt Overhang in the Enterprise Sector_**

In this section we examine the level and currency structure of bank credit among firms in Emerging Europe. Relating firm debt to aggregate contraction in GDP, export volume as well as to currency depreciation we assess in which countries firms are more likely to face debt overhang due to excessive leverage and unhedged foreign currency borrowing.

# <u>The Use of Bank Credit</u>

The main data source of our analysis is the _Business Environment and Enterprise Performance Survey_ ( _BEEPS_ ). The European Bank for Reconstruction and Development (EBRD) and the World Bank jointly conducted this survey in 1999, 2002, 2005, and 2009.<sup>6</sup> Our analysis is based on the 2009 wave of the survey, which was carried out at the onset of the financial crisis (October 2008 – April 2009). BEEPS 2009 provides data on 9,098 firms from the 21 ECA countries covered in this background paper. The sample provides a representative sample of firms for each of these countries.<sup>7</sup> By contrast, databases that offer financial statement information, such as Worldscope or Amadeus, typically cover only the larger, formal enterprises in the region.

We use three indicators of the use of bank credit by firms. Our first indicator _Bank loan_ is a dummy variable measuring whether the firm had a bank loan or credit line at the time of the survey (end of 2008, beginning of 2009). Likewise the indicator _Overdraft_ is a dummy variable measuring whether the firm had access to an overdraft facility at the time of the survey. Finally, the indicator _Leverage_ captures the share of assets purchased in 2007 that were financed with bank credit (only measured for those firms which actually purchased assets in 2007). Table 4.1 provides an overview of these three indicators of bank finance by country, whereby we distinguish between EU 10 countries, (potential) EU candidate countries and EU neighborhood countries. The table shows that half of the firms in Emerging Europe use bank loans or an overdraft facility, while on average only one-quarter of recent firm investment is financed through a bank loan. The use of bank credit differs strongly across regions. In the EU member

> 6 With BEEPS Brown et al. (2011a), and Popov and Udell (2010) analyse credit availability, Gorodnichenko and Schnitzer (2010) analyse financial constraints and firm innovation, while Ranciere et al. (2010) focus on the impact of currency mismatch on firm performance.

> 7 The survey covers all 29 countries in which the EBRD is operational, with the exception of Turkmenistan. See <u>http://www.ebrd.com/country/sector/econo/surveys/beeps.htm for detailed information on BEEPS 2009.</u>

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