What is too fast, when the creditors are running to get out before the coming bust by goosing their balance sheet to justify its anticipated growth that has already been capitalized in its present share prices, that are upended into the remotest future? Isn’t this the ultimate quandary of a system to that lends its money into existence?

"Foreign banks including Citigroup Inc., General Electric Co.’s GE Capital and Germany’s Commerzbank Agire are moving to set up or expand in the fastest-growing region, which includes eight countries that recently joined the EU. Foreign banks now control 53% of Bulgaria’s banking system and 70% of Poland’s.

"Expansion behind the former Iron Curtain was one of the chief motivations for Europe’s biggest cross-border banking deal ever: UniCredito Italiano SpA’s $21 billion acquisition of HVB Group of Germany. Both banks have substantial operations in the former communist bloc. The combined bank will account for 24% of Bulgaria’s tender offer for HVB shares that closes this month.

"In Bulgaria, consumer loans, excluding mortgages, increased by 46% in the past year to $2.1 billion. Mortgage lending also has soared.

"Bulgaria’s central bank and its advisor, the International Monetary Fund, are worried that the lending spree has been too dramatic. The central bank has clamped down on easy credit, concerned that the expansion of lending, if left unchecked, could undermine the economic growth that made the country so attractive to the financial industry in the first place. How the banks navigate the credit boom in Bulgaria and elsewhere will determine not just how their investments pan out but could also help shape the fate of these formerly communist economies and perhaps of EU as a whole.

"These formerly communist countries that entered the EU in 2004 are growing at an annual rate of more than 5%, compared with 1% to 2% in most of Western Europe. And Central and Eastern Europe, with 385 million people – five million more than Western Europe – has a young, well-educated population that is attractive for companies looking for cheap labor and access to rapidly developing markets. Auto makers such as Japan’s Toyota Motors Corp. and France’s PSA Peugeot Citroen are both ramping up plant production in the region.

"Many borrowers are racking up credit for the first time as credit cards, personal loans and mortgages become widely available. The value of overdue customer credit accounts in Bulgaria rose 73% in the past year, though they remain just slightly more than 1% of consumer loans outstanding. And the construction boom and glut of office space has prompted fears of a speculative bubble."

In short the Western economy, running to get away from itself, is threatened with crashing into a mirror.

"By Western standards, these countries have been relatively starved of lending and other banking services. Banking assets at the 400 lenders across the region totalled $523 billion at the end of 2004 or just 74% of the combined Gross Domestic Product of these countries, according to Bank Austria Creditanstalt. The figure for the whole of the EU is 206%.

"Only one in three Poles has a personal bank account. Credit cards were used for only 2% of total Polish consumer payments as of the end of 2003, the most recent data available according to Pricewaterhouse-Coopers. US consumers use plastic for 20% of their purchases, while shoppers in the UK do so for 13% of theirs, according to industry analysts.

"Banks are using Western lending and sales practices in the race to win new customers. Erste Bank of Austria in 2000 purchased Ceska Sporitelna, a formerly government-owned savings bank in Prague. Erste turned to Jack Stack, a former retail executive at J.P. Morgan & Co. to be Ceska’s CEO even though he’d never lived outside New York, hoping his experience in consumer banking would come in handy in the Czech Republic.

"The Austrian bank has made nine acquisitions in Eastern Europe since 2000, says Michael Mauritz, an Erste official. Each one included a provision that ensured Erste wouldn’t be responsible for any loans made before the purchase.

"Erste plans to continue its aggressive buying spree in the region, with its sights already trained on buying banks in the Ukraine and Romania.

"In the mid-1990s, Bulgaria’s state-owned banks, which had provided massive loans to state-owned companies, were forced into bankruptcy. The Bulgarian currency, the lev, dropped against the dollar and consumers withdrew their deposits fearing a run on the banks. But a gradual privatization beginning in the late 1990s opened the door to acquisitive Western banks. UniCredito Chief Executive Alessandro Profumo, eager to expand his Italian-based bank to the East, began charging into the region seven years ago. ‘It was clear by 1998-9 that growth in [Western] Europe was going to slow down and in Italy we were already big,’ he says. ‘We had to go somewhere else for growth.’

"It was a bold move into a region still suffering the fallout of Russia’s default on its government debt in 1998, an event that rocked global financial markets. But in 1999, UniCredito won a bid to acquire 52% of Poland’s formerly state-owned Bank Pekao and took the first step in a fast expansion trail across the region. Soon, Poles started to notice the new ease with which they could get credit and access to their funds.

"The rise in credit was so steep that the central bank last year took steps to rein in lending by increasing provision rules for banks, among other measures. Despite the moves, loans continued to soar as more banks, facing a slowdown in Western Europe, scrambled to gain market share. Credit rose by 49% in 2004 after a 48% rise in 2003. In February, the central bank ordered that if bank credit exceeded a certain ceiling, the banks would have to increase their reserves to slow credit growth to about 30% by the end of the year."

What is lacking is data on how much the Italian mother-bank has become dependent on the expansion of earnings of its new banking interests in the European wild east.

– from Economic Reform, November 2005