The continued weakness on the balance sheets of leading global banks continues to be the main obstacle facing emerging markets in Europe and the Commonwealth of Independent States, or CIS.

These markets previously benefited from an investment influx from banks in highly developed countries, said Lorenzo Giorgianni, the International Monetary Fund’s former Turkey desk chief.

Speaking to the Hürriyet Daily News & Economic Review on Tuesday, Giorgianni, who is now assistant director at IMF’s emerging markets division, said it is unclear whether credit from advanced to emerging economies will resume at the same pace as prior to the crisis.

“If you look at previous crises in Latin America and Asia, the track record is that cross-border bank flows from advanced economies to emerging-market countries that are hit by a regional crisis tend to be reduced permanently after the crisis. There is a big question mark there whether western countries will remain as engaged with eastern European countries and the CIS region,” Giorgianni said.

Lack of appetite

In addition to the credit-supply issue there is also a demand issue, as borrowers that have accumulated large debts in the CIS and eastern European regions will remain unable to shoulder further debt for a number of years. “So there is the issue of weakened supply of credit but also reduced credit worthiness of debtors, which mean lower credit flows, translating one-to-one into much lower potential growth going forward,” Giorgianni said.

Prolonged recovery in Eastern Europe

Emerging markets were pulled into the financial crisis through exposure to the sudden stop in capital and trade flows. “Emerging markets typically rely on exports to grow rapidly, and so collapsing global trade has dealt a huge blow to their ability to grow,” Giorgianni said. However, prospects for emerging-market countries, particularly those in Asia that had been relatively shielded, are now rapidly improving, he said.

“But obviously their destiny remains closely linked to the performance of developed CEE countries. So, for example, the recovery of countries in Eastern Europe and the CIS region – tightly linked to western European economies and Russia – is projected to be quite prolonged because both Russia and western European countries are not expected to have as rapid a recovery as other economically advanced countries,” Giorgianni said