Transitional Economies: Banking, Finance, Institutions

GeorgeTridimas

The failure of state-owned-enterprises (SOEs) in post-socialist economies to repay their debts to the banking sector, the so-called ‘bad loans problem’, is considered as one of the most important impediments to successful economic transition. Accumulation of bad loans, the argument runs, distorts the allocation of scarce capital and delays the restructuring of enterprises, restricts lending to the public sector, jeopardizes the health of the balance sheet of banks and imperils the privatization process of firms and banks alike. The quantitative significance of the problem is recorded in Table 1.1, which presents the profile of the ratio of bad loans to total loans for the transition economies during the period 1994–98. From an (unweighted) average of almost a quarter of the total stock of loans, the share has decreased over time, but still claims 14 per cent of the total. Although the precise size of bad loans and its pattern of change varies from country to country, no transition economy has been spared its far-reaching consequences. Partly as a result of deliberate policy action and partly as a result of unpredicted economic shocks, in some countries, such as Albania, Azerbaijan, Romania, the Czech and the Slovak Republics, the ratio has remained stubbornly high (and often increasing), while in other countries significant progress has been made towards decreasing it, for example in Hungary, Poland, Latvia, Lithuania, Kyrgyzstan and Armenia, although in the latter countries the move has not necessarily signalled the establishment of hard budget constraints on enterprises. It is also clear that the problem of bad loans is an endemic one that afflicts vulnerable countries irrespective of the stage of transition, level of economic development and progress towards liberalization.

Non-performing bank loans to state-owned-enterprises in transition economies have long been recognized as a covert method of

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