Leveraging Financial Markets for Development by Peter Volberding

Author:Peter Volberding
Language: eng
Format: epub
ISBN: 9783030550080
Publisher: Springer International Publishing

The Collapse of the Eastern Bloc and Financial Assistance

The ensuing collapse of the USSR in 1991 exacerbated the already delicate situation for the German government. Within a matter of months, a political vacuum emerged that created uncertainty for the regional economy. Moreover, the newly independent states of Poland and Czechoslovakia bordered Germany, and political instability raised the prospect for extensive social unrest and dislocation. In particular, German politicians were concerned about how such a monumental change could threaten the tenuous process of reunification with the collapse of the GDR’s Eastern European export markets. In addition, the prospect for a flood of immigration incentivized German politicians to invest in the newly independent states in an effort to bolster their flagging economies. Concurrently, West German industry saw huge opportunities for investment and new export markets, and politicians saw avenues to bring Eastern Europe into the political fold of the EU (cf. DBJ 1992). For its part, KfW had already significantly expanded its services via export finance credits and programs in the former GDR. The prospect for even greater demand necessitated an increase in staff, credit lines, and capital market operations. Moreover, unlike reunification, KfW would have to operate internationally without the ability to directly influence government operations.

Prior to the fall of the Eastern Bloc, KfW attempted to shore up the former GDR’s external economic relations via an expansion of export finance credits. The GDR was compelled to export to Eastern Europe prior to reunification, but incorporation with West Germany opened opportunities to export to new markets. Existing commitments with the CIS countries were denominated in rubles and weighed upon the balance sheets as savvy businessmen could exploit arbitrage opportunities between currencies (Harries 1998, 193). Immediately following the Soviet Union’s disintegration, KfW needed to shore up the GDR’s economic relations with the newly independent states. In 1991 and 1992, KfW rescheduled existing financing debts on generous terms and provided new credit lines while the transition to market rates continued. Extensive export guarantees, supported in conjunction with the Federal German government’s Hermes credit coverage, to Eastern Europe were supported with additional KfW financing from ERP funds. For exports to the Soviet Union from the states of East Germany, Hermes guaranteed 100% of the loan when normally there was a maximum rate of 85% (DBJ 1992, 39). In 1992, KfW issued a record-breaking DM 2.6 billion in loans for exports from the former GDR states; this accounted for 30% of total KfW export financing volume. However, these remained heavily concentrated in the CIS states; of the DM 530 million in export credits from KfW in 1996, only DM 17 million went to countries outside the former Soviet Union and its allies (Harries 1998, 194). It was quickly apparent that both the former GDR and the newly independent Eastern European states were not competitive on the global market, and economic transition concomitantly made these new states poor markets for exports. As such, export credits did not prove to be a good strategy to shore up the economies of any of the countries (KfW 1993, 37–38).

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