The financial crisis and economic downturn threatens the welfare of more than 160 million people who are poor or are just above the poverty line in the economies of Eastern and Central Europe, the former Soviet Union, and Turkey. This note concerns the findings of recent World Bank analysis (Tiongson et al. 2010)1 that uses precrisis household data and aggregate macroeconomic outcomes in these countries to simulate the impact of the crisis on households—transmitted via credit market shocks, price shocks, and income shocks. The adverse effects are widespread, with both poor and nonpoor households being vulnerable. By 2010, for the region as a whole, it is estimated that some 11 million more people will be in poverty and more than 23 million additional people will find themselves just above the poverty line because of the crisis.financial cirsis, stress testing, household income, Europe, Central Asia, welfare, Soviet Union, Turkey, World Bank, shocks

Sugawara, Naotaka

Sulla, Victor

Taylor, Ashley

Tiongson, Erwin R.

English

Research Papers in Economics

1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
MAY 2010  • Number 12
Economic Premise
POVERTY
REDUCTION
AND ECONOMIC
MANAGEMENT
NETWORK (PREM)
THE WORLD BANK
The Crisis Hits Home: Stress-Testing Households in Europe and
Central Asia
Naotaka Sugawara, Victor Sulla, Ashley Taylor, and Erwin R. Tiongson
Poverty Gains Made over the Last Decade
Are at Risk of Reversal
During the recovery period following the 1998 Russian crisis,
some 50 million people moved out of poverty in the economies
of Eastern and Central Europe, the former Soviet Union, and
Turkey (the economies that make up the World Bank’s Europe
and Central Asia Region).2 Poverty fell throughout all the sub-
regions of Europe and Central Asia, led by the populous, mid-
dle-income countries of the Commonwealth of Independent
States (CIS). Such a massive reduction in poverty was driven
by rising incomes everywhere, particularly through rising real
wages among the working poor.
The global financial crisis, which has led to a sharp slow-
down in regional economic activity, now risks reversing the
substantial gains and improvements achieved in living stan-
dards over the last few years. Countries are facing a number
of major and interrelated economic shocks. The first shock
is the global slowdown leading to lower export revenues.
Furthermore, to low-income countries such as Moldova and
Tajikistan, remittance inflows have fallen. Meanwhile, the
crisis drastically reduced the availability, and increased the
cost, of external finance across public, corporate, and finan-
cial sectors. Finally, as commodity prices fell, commodity-
exporting countries suffered.
All in all, the crisis threatens the well-being of close to 40
million people who are still poor. It also threatens the wel-
fare of an additional 120 million people who are living just
above the poverty line and are at risk of easily falling into
poverty as economies contract.
The Crisis Is Hitting Households on Multiple
Fronts
Three main transmission channels through which macroeco-
nomic shocks reach households are analyzed here: (1) access
to financial markets (including the cost of borrowing and
the burden of debt service payments), (2) the relative prices
The financial crisis and economic downturn threatens the welfare of more than 160 million people who are poor or
are just above the poverty line in the economies of Eastern and Central Europe, the former Soviet Union, and
Turkey. This note concerns the findings of recent World Bank analysis (Tiongson et al. 2010)1 that uses precrisis
household data and aggregate macroeconomic outcomes in these countries to simulate the impact of the crisis on
households—transmitted via credit market shocks, price shocks, and income shocks. The adverse effects are
widespread, with both poor and nonpoor households being vulnerable. By 2010, for the region as a whole, it is
estimated that some 11 million more people will be in poverty and more than 23 million additional people will find
themselves just above the poverty line because of the crisis.of goods and services, and (3) income and employment. The
focus on these mechanisms reflects lessons gleaned from an-
alyzing the social effects of crises over the last three decades
as well as data availability constraints. However, this focus
does ignore several important elements, such as wealth ef-
fects associated with changing values of property and equity
holdings (including pensions), the second-round effects of
the  crisis,  and  the  combined  consequences  of  multiple
shocks. The role of government policy and social assistance
is also not addressed explicitly in the quantitative analysis.
Depending on how governments formulate and implement
such policies, they may either dampen the impact of shocks
or worsen them. 
The Analytical Approach
During the financial crisis, stress tests of the health of finan-
cial institutions have become subjects of intense interest to
policy makers, politicians, and the public. At the same time,
parallel analysis at the household level has received in-
creased attention. Using precrisis household data, along with
aggregate macroeconomic outcomes (because actual house-
hold survey data over the crisis period typically will not be
available for some time), the household impact of key eco-
nomic shocks already being felt can be simulated. In turn,
this simulation analysis can feed back into financial sector
health through the effect on household debt distress. Much
of the recent work in this area has been stimulated by rising
levels of household indebtedness in both developed and de-
veloping economies.3
Building on this literature, Tiongson et al. (2010) analyze
household vulnerabilities by examining credit markets, ex-
ternal prices (food and fuel), and income shocks during the
crisis and by assessing their impact on household welfare.
The impact on household well-being is quantified as the
change in the household debt service burden, the fall in real
income, or movements into poverty, as appropriate. The mi-
croeconomic simulation in the report draws on a large, cross-
country database of household surveys, bringing together for
the first time comparable data on household indebtedness
for a large group of European and Central Asian countries
using the European Union’s Survey of Income and Living
Conditions and Household Budget Surveys. 
Many Households Will Risk Defaulting as
Debt Service Obligations Rise
The rapid rise in household access to credit—in the new Eu-
ropean Union member-states, some Western Balkan coun-
tries (such as Albania and Serbia), and CIS countries (such
as Ukraine)—has both brought benefits to households and
exposed them to potential credit market shocks. Borrowing
enables households to smooth their consumption, purchase
durable goods, and invest in housing. However, because of
the specific characteristics of household loans in the region,
this rise in indebtedness (figure 1) means that payment ob-
ligations can increase very sharply when shocks are realized.
First, many households borrowed in foreign currency, expos-
ing the local currency value of their payment obligations to
exchange rate depreciations (figure 2). Second, many house-
2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
e
n
d
-
p
e
r
i
o
d
 
p
e
r
c
e
n
t
 
o
f
 
G
D
P
50
40
30
20
10
0
Bulgaria
Sources: European Central Bank, national central banks, International
Monetary Fund, and UniCredit.
Note: ECA = Europe and Central Asia.
Croatia
Czech Rep
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak Rep
Slovenia
Belarus
Kazakhstan
Russian Fed
Ukraine
Armenia
Turkey
Figure 1. Household Debt, Selected ECA Countries, 2008
country
EU10 plus Croatia middle-income CIS other
p
e
r
c
e
n
t
 
o
f
 
b
a
n
k
 
l
o
a
n
s
 
t
o
 
h
o
u
s
e
h
o
l
d
s
100
75
50
25
0
Bulgaria
Sources: The National Bank of Hungary and other national central banks.
Croatia
Czech Rep
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovak Rep
Armenia
Belarus
Kazakhstan
Russian Fed
Ukraine
Macedonia, FYR
Turkey
Figure 2. Foreign Currency–Denominated Loans, 2008
country
EU10 plus Croatia CIS otherholds have loans that have variable interest rates. In addition,
those people who recently have lost their jobs will have an
even more difficult time meeting their payment obligations.
The results of the stress tests on household loans suggest
that the adverse effects of the crisis on households are wide-
spread. Both poor and nonpoor households may be affected,
depending on the shock, transmission channel, and house-
hold characteristics. The share of vulnerable households or
borrowers at risk (among all indebted households) will grow
(see the unemployment shock example illustrated in figure
3). Although the shares of indebted households and house-
holds at risk in Europe and Central Asia still lag behind those
of richer countries, the aggregate effects of rising debt service
burdens are already seen in rising household loan delin-
quency rates.
In Some Countries, Food and Fuel Prices Will
Rise as the Value of Currencies Fall, with the
Poorest Consumers Vulnerable Again
Global food and fuel prices have fallen from their highs of
2008, but international commodity prices have not returned
to pre-2007 levels. In addition, falling currencies in some
countries have resulted in a new round of price increases,
depending on the share of imported food and fuel in local
consumption and on the degree of exchange rate pass-
through. Finally, in a number of countries (such as Belarus,
Moldova, and Ukraine), reforms in the utility sector remain
largely incomplete. As a result, for reasons of economic effi-
ciency or fiscal consolidation, a number of countries will
have to adjust their energy tariffs to cost-recovery levels in
the coming years.
The impact on households of a food or fuel price crisis is
not straightforward. The experience with the recent food
price crisis, for example, tells us that the net effect of a rapid
increase depends on whether households are net producers
or net consumers of food, on how much food they consume
and  whether  there  are  cheap  substitutes,  and  on  their
sources of livelihood and their ability to take advantage of
profitable opportunities in agriculture. These considerations
suggest that, at least in principle, poor people are not neces-
sarily the hardest hit. However, food represents a very large
share of the poor’s total consumption. In low-income coun-
tries of the region, the food share of consumption among
the poor is 80 percent. Moreover, in reality, the poor are
most greatly affected because many of them (for example,
the poor in Albania, the Kyrgyz Republic, and Tajikistan) are
also observed to be net consumers, with limited access to
agricultural assets and inputs.
Rising Poverty Resulting from Employment
and Income Shocks 
The poverty impact of the regional recession will be enor-
mous.4The results of simulations suggest that, in 2010, there
will be 11 million more people in poverty and an additional
23 million people just above the international poverty line
(a total of 34 million more poor and vulnerable people), rel-
ative to precrisis projections for growth and poverty (figure
4).5The growth in poverty would represent a fifth of the re-
gion’s population who recently moved out of poverty. This
is not surprising, given that regional poverty is shallow, with
many individuals susceptible to a fall into poverty even with
modest decreases in average income. Alternatively, one could
think of these people as the recently poor, with fragile links
to the labor market and little savings, who have benefited
from recent credit and construction booms.
The magnitude of the estimated poverty impact varies by
subregion (figure 5). The middle-income CIS countries, on
3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
p
e
r
c
e
n
t
 
o
f
 
i
n
d
e
b
t
e
d
h
o
u
s
e
h
o
l
d
s
30
20
10
0
Estonia
Sources: EU-SILC data and World Bank staff calculations.
Note: EU-SILC = European Union’s Survey of Income and Living
Conditions. The simulated shock is an increase of 10 percentage points in
unemployment rates. This refers to mortgage debt only. Vulnerable
households are identified using a 20 percent interest payment threshold.
See Tiongson et al. (2010) for more details. 
country
Hungary Lithuania
Figure 3. Vulnerable Households/Borrowers at Risk as a Result of
Unemployment Shock
before the shock
after the shock
p
o
p
u
l
a
t
i
o
n
(
m
i
l
l
l
i
o
n
s
)
175
150
125
100
2007 2008 2009 2010
Sources: International Monetary Fund WEO databases and World Bank
staff calculations.
Note: WEO = World Economic Outlook. This figure uses US$5 a day as the
measure of poverty.
year
Figure 4. Poor and Vulnerable Populations, 2007–10
160.0
148.8
145.5
158.7
130.7
153.6
119.3
precrisis growth projection
(April 2008 WEO)
crisis growth projection
(April 2009 WEO)average, have seen the largest and most significant down-
ward revisions to their GDP growth projections. As a result,
they are also seeing the largest percentage-point increases in
the projected poverty head count. These countries are fol-
lowed closely by the low-income CIS countries. The overall
results mask the variety of possible effects within countries,
including the concentration of the poverty impact in se-
lected economic sectors. Recent World Bank country studies
suggest  that,  for  economic  shocks  transmitted  mainly
through the labor market, poverty will rise especially among
households that have been dependent on remittance inflows
and those previously employed in booming construction sec-
tors where economic activity is now projected to decline
sharply (World Bank 2009a, 2009b, 2009c). 
Coping with the Crisis and Policy Response
In some ways, the simulated effects described above may be
understated because they capture only a subset of the first-
round effects. Second-round effects on access to education,
health, and social services, in particular, can be significant.
How can households protect themselves? In the current re-
gional downturn, the scope for households to engage in their
traditional coping strategies (such as secondary employment
or migration) may be limited. This means that the policy re-
sponses to the crisis are critical. 
In many countries, however, the immediate fiscal policy
response has been constrained by rapidly falling revenues.
Many countries have substantial government deficits; and,
in the absence of new financing sources or the presence of a
limited scope in which to mobilize revenues, they may resort
to across-the-board cuts in spending. Such blunt adjust-
ments likely will substitute for efforts to improve the effi-
ciency of public spending. Although social safety nets will
be among those items likely to be cut as revenues fall, pro-
tecting these programs—and possibly expanding some of
them, where some reallocation of resources are possible—is
an important element in the response to the crisis. The re-
gion’s social protection systems currently vary in size and
targeting performance, and so the response to the crisis may
involve expanding some well-performing programs, reform-
ing relatively less-effective interventions, or introducing new
programs as appropriate. In the context of constrained fiscal
resources, prioritizing investment expenditures that use
labor also could be one option for addressing the labor mar-
ket consequences of the crisis.
4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise
Figure 5. Change in the Population’s Poverty and Vulnerability in 2010, Based on Crisis and Precrisis Growth Projections
Source: International Monetary Fund WEO databases and World Bank staff calculations.
Note: WEO = World Economic Outlook. Rise in the percent of the population in poverty, calculated using April 2009 WEO growth projections for 2010,
relative to calculations using precrisis April 2008 projections. 
3.0 or lower
3.1–6.0
6.1–9.0
9.1–12.0
12.1–15.0
15.1 or more
percentage pointsNotes
1. The full report on which this Economic Premise is based
is available through the World Bank’s Web site. See Tiongson
et al. (2010) in the References section. 
2. Alam et al. (2005) provide analysis of the trends in
poverty in the region and details many of the household sur-
vey data sets used in the current report.
3. For example, see the analyses of Sweden by Johansson
and Persson (2006); of Hungary by Holló (2007); of the Re-
public  of  Korea  by  Karasulu  (2008);  and  of  Poland  by
Z
•
ochowski and Z
•
ajaczkowski (2007).
4. See Chen and Ravallion (2009) for an analysis of the
impact of the crisis on global trends in poverty.
5. These calculations are based on a comparison of the
poverty simulations for 2010 using the April 2009 Interna-
tional Monetary Fund’s World Economic Outlook projections
for growth with those using precrisis projections from the
April 2008 World Economic Outlook.
About the Authors 
Naotaka Sugawara is a consultant and Victor Sulla is an econ-
omist for the World Bank Europe and Central Asia Region;
Ashley Taylor is an economist for the East Asia and the Pacific
Region of the World Bank; and Erwin R. Tiongson is a profes-
sor at the Center for Development Management, Asian Institute
of Management, Manila, Philippines.
The views expressed are those of the authors, and should not be
attributed to the World Bank or any affiliated organization.
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and E. Tiongson. 2005. Growth, Poverty, and Inequality: Eastern Europe
and the Former Soviet Union. Washington, DC: World Bank.  http://go.
worldbank.org/12MK6K5P20.
Chen, S., and M. Ravallion. 2009. “The Impact of the Global Financial Crisis
on the World’s Poorest.” VoxEU.org, April 30. http://www.voxeu.org/in
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Holló, D. 2007. “Household Indebtedness and Financial Stability: Reasons
to Be Afraid?” MNB Bulletin November: 23–30. http://english.mnb.hu/
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ochowski, D., and S. Z
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The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty
Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily
reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.

Armenia: Implications of the Global Economic Crisis for

Household Indebtedness and Financial Stability: Reasons to Be Afraid?”

Monetary Fund).

Republic of Tajikistan: Poverty Assessment.” Report No.

Stress Testing Household Debt

Swedish Households’ Indebtedness and Ability to Pay:

The Crisis Hits Home: Stress-Testing Households in Europe and Central Asia.Washington DC: World Bank.

The Distribution and Disper -sion of Debt Burden Ratios among Households in Poland and Its Implications for Financial Stability.”

The Crisis Hits Home: Stress-Testing Households in Europe and Central Asia

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The Crisis Hits Home: Stress-Testing Households in Europe and Central Asia

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