To keep vulnerable people from slipping into poverty, European governments will once again need to step in and provide a safety net. Government funds and public policies did a relatively good job of keeping poverty at bay during the pandemic. But stiff price rises pose a new threat.
Banks under pressure
The conflict has forced some European banks, like Raiffeisen, to consider pulling out of Russia. Overall, however, European banks’ direct exposure to Russia and Ukraine is relatively low. At the end of 2021, European banks’ exposure to Russia (loans, advances and debt securities) was €76 billion, while exposure to Ukraine was €11 billion, according to the European Banking Authority.
Austrian, French and Italian banks were the most active in Russia, while French, Austrian and Hungarian banks were heavily involved in Ukraine. Yet only Austrian and Hungarian banks reported that the two countries represented more than 2% of their total lending. In general, banks have shored up their capital reserves sufficiently in recent years to be able to absorb any losses in the region.
Right now, the biggest source of risk is banks’ exposure to the sectors – chemicals, transport, and food and agriculture – most affected by trade disruptions. On average, however, only 30% of EU bank loans went to sectors at risk.
The biggest threat for the economy, in fact, is that credit dries up. Rising interest rates are already making loans more expensive. Credit standards have started to increase in Central and Southern Eastern Europe. The strain put on EU firms could also cause the quality of loans to deteriorate, making banks hesitant to lend.
That’s a lot for EU firms already stumbling from a one-two punch.