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Can banks trade out of trouble?

As the world enters the fifth year of economic growth, regulators, shareholders and creditors of international banks must be starting to wonder what horrors are building up on the banks' balance sheets. Disturbingly, the problem loans ­ if they exist ­ will probably be hidden from public scrutiny in the form of bilateral lines. No doubt they are being justified to the banks' internal credit committees by that well-worn excuse that they are essential to maintain relationships with clients that offer other, more profitable business.

Banks continue to lend their money at thinner and thinner margins, even to riskier borrowers. Take Hungary. In September 1995, the National Bank of Hungary, rated Ba1/BB+ by Moody's and Standard & Poor's, paid 150 basis points over Libor for five-year money. By August 1996, it had pushed its banks to lend at 50bp over Libor. By the end of last year, it was renegotiating terms to as low as 20bp over. There has been no credit rating upgrade in the meantime to explain this dramatic improvement. If National Bank of Hungary can push for such terms, what price are strong-rated corporates or supranational borrowers able to achieve?

And there are few corners of the lending business where banks will not tread nowadays.

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