Just before the 2008-9 global financialcrises, policy makers were concerned about the rapid growthof bank credit, particularly in Europe; now, worry centerson a potential global credit crunch led by European bankinginstitutions. While recognizing that concrete evidence islimited by significant data gaps and lags, this notediscusses the dynamics of European bank deleveraging andpossible implications for emerging market economies (EMEs).Overall, the information available as of early 2012 shows amarked deterioration of credit conditions across Europe.Data also suggest that spillover effects are already beingfelt around the globe and imply significant channels throughwhich deleveraging could have disruptive short and long-termconsequences for credit conditions in EMEs, particularly inCentral and Eastern Europe (CEE). However, the significantliquidity support provided by the European Central Bank(ECB) since December may be a 'game changer,' atleast in the short term, because it has helped revivemarkets and limited the risk of disorderly deleveraging. Theextent, speed, and impact of European bank deleveraging willhenceforth depend largely on the evolution of marketconditions, which in turn are guided by the ultimate impactof ECB liquidity support, attainment of sovereign debtsustainability and fiscal convergence within the euro zone,and credibility of the European rescue fund as an effectivefirewall against contagion.
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