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2021 | OriginalPaper | Chapter

Financial Instability and Economic Growth in Transition Economies

Author : Savvas Zachariadis

Published in: Global, Regional and Local Perspectives on the Economies of Southeastern Europe

Publisher: Springer International Publishing

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Abstract

The paper focuses on the fiscal and financial position of European post-socialist countries prior to the Global Financial Crisis (GFC) of 2007–2009 and afterwards. It highlights the impact of the transmission of crisis and the changes that have been ensued in terms of the pattern of economic growth. For this reason, it reviews the relation of higher GDP growth rates and the deepening of financial development, a model that had been adopted by the majority of countries until the outbreak of the crisis. More precisely, emphasis shall be given to Bulgaria, Romania, and the Baltic States due to the fact that these countries had experienced the most intense effects. Furthermore, we incorporate Minsky’s financial theory in order to identify the resemblances of the theory with their domestic financial systems and to reveal the weaknesses and vulnerabilities of their fiscal and financial stance. The scope is to indicate that the pursuit of a rapid accelerating GDP growth rates based solely on the financialisation of the economy does not constitute a panacea policy for total economy. Thus, we display relative macroeconomic data in relation with growth GDP rates ex ante and ex post the crisis. Hence, we address the issue that the advent of Global Financial Crisis has induced the countries under examination to moderate their economic policy of credit expansion and high indebtedness towards more balanced and steady growth pattern at the expense though of lower annual GDP rates.

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Footnotes
1
During the Communist period not only all countries shared the same degree of centralization. For instance in Hungary, Poland and the former Yugoslavia some independence was given in firms but for Bulgaria, Romania and the Baltic countries, as members of the Soviet Union, the status quo was quite different.
 
2
Romania and Bulgaria have joined EU during the second enlargement wave in 2007.
 
3
Mainly by Austrian, Belgian, German and Italian banks.
 
4
The private sector debt is the stock of liabilities held by non-financial corporations and households and non-profit institutions serving households. The instruments that are taken into account to compile private sector debt are loans and debt securities.
 
5
The mortgage lending growth was also related to rapid growth in house prices resulting in an overvaluation of house prices.
 
6
An empirical example also stems from Peak and Rosengren (1997) who note that when Japanese banks experienced losses due to a decline in the stock market, their subsidiaries in U.S. have reduced lending more than the parent bank in home market. Also, when a foreign subsidiary bank in Croatia suffered large currency losses in 2002 the parent bank did not act as lender of last resort.
 
7
A decrease in the price of a basic world-wide traded good, such as wheat or cotton, it is possible to influence markets, economies and domestic financial systems even if the initial shift in price has emerged somewhere else. That is because the determinant factor is the amount of the leverage of speculators and the vulnerability of these markets.
 
8
Speculative borrowers can only validate the interest payment but not the principal and thus must roll over the financing with another loan. Ponzi units cannot meet either the principal or the interest and the options left, expect for new borrowing, is to sell assets or dividends, lowering in that way the margin of safety.
 
9
Lahart (2007), ‘In time of tumult, obscure economist gains currency’, p. 1. The Wall Street Journal, August 8. The term Minsky moment was adopted by Paul McCulley, the managing director of Pacific Investment Management Company in 1998 during the Russian crisis (Lahart 2007). Hence, the term became popular even from newspapers to describe financial crises such as the sub-prime crises.
 
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Metadata
Title
Financial Instability and Economic Growth in Transition Economies
Author
Savvas Zachariadis
Copyright Year
2021
Book
Global, Regional and Local Perspectives on the Economies of Southeastern Europe

Print ISBN: 978-3-030-57952-4

Electronic ISBN: 978-3-030-57953-1

Copyright Year: 2021

DOI
https://doi.org/10.1007/978-3-030-57953-1_10