The purpose of the paper by Begg and Portes is to discuss the problem of enterprise debt in the context of the transformation of the economies of Central and Eastern Europe, and to propose a sequencing of reforms designed to tackle it.

In these comments I will first consider the stylized facts documented in the paper, then I will propose a simple model of banking that captures some of the costs of increased bank lending to state-owned enterprises, to conclude with some comments on the policy proposals set out in the paper.

The facts

The paper starts with a section in which the problem is identified. I have two comments on this section. First, I do not find the evidence on the magnitude of the problem entirely convincing. In particular, Tables 8.1 and 8.3 do not show a very significant pattern of increased bank credit to state-owned enterprises in Central and Eastern Europe. Second, I think that the discussion of the causes and consequences of the explosion of inter-enterprise credit is much weaker than what would be required to support the line of argument in the paper. In this respect, I would have liked to see a serious effort to model the relationship between bank and interfirm credit. At any rate, I basically agree with the conclusion that ‘policy should address the financial health of banks and enterprises [and that] with that restored, inter-enterprise credit will take care of itself’.