Assessing the Sustainability of Credit Growth: The Case of Central and Eastern European Countries

Abstract

Credit growth rates as high as 30% or 50% a year were observed in some Central Eastern European countries (CEECs) in 2006-2007, such as the Baltic States, Bulgaria or Romania. This strong credit growth could have been due to the catching-up process but could also have been excessive, paving the way to the credit crunch that followed the crisis in 2008-2009. We try to assess the excessiveness of credit by applying a number of methods. First, we consider the gap between current credit and its long-term trend and we find some signs of credit booms, in several CEECs in 2005-2007. Second, we assess the "normal" growth of credit with regard to fundamentals through econometric estimations. Credit growth is also shown to have been excessive in several countries just before the 2008-2009 financial crisis.

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