Financial frictions and indebtedness of Balkan firms: A comparison with Mediterranean and Central European countries

Using a large database of financial data for non-financial corporations, we study the process of debt accumulation and its influence on liquidity through the boom-bust-recovery regimes (2006–2010) in the Balkan countries and benchmark this against the Mediterranean and Central European countries. The domestic amplification effects (through the financial accelerator and collateral pricing) of both the capital surge from developed EU countries at the onset of the crisis and the capital reversal afterwards are the focus of the analysis. We show that domestic generators and amplificators of the crisis have much larger effects in the Balkan countries than in the Mediterranean countries, not to mention the countries of Central Europe. In the boom period, the financial accelerator was several times stronger in the Balkan countries than in the Mediterranean and Central European countries. In the bust and recovery periods, however, the direct effects of the financial accelerator declined, but the indirect effects increased considerably due to liquidity squeezes and contagion, especially strong were corresponding intercompany debt effects. In the Balkan countries, these effects in the bust and recovery periods were at least 50% larger than in the Mediterranean and Central European countries. Higher crisis costs in the Balkan countries, relative to the benchmark regions, could be attributed to the late integration of these economies into international financial and trade flows, weak institutions of financial intermediation, and inexperienced regulators; however, the importance of the contribution of misguided EU convergence doctrine cannot be ignored. Lessons for improving macromanagement in EU periphery countries are suggested.     

Policy measures in the deleveraging process: A macroprudential evaluation

This paper evaluates post-crisis effects of deleveraging policy in Slovenia. Reductions in banks’ credits to nonfinancial sectors were driven by increased collateralization, credit rationing, and a neglect of cash flow performance of banking clients. These jeopardized the normal deleveraging of companies with positive cash flows, and rolling over credits, which stifled economic growth. Erroneous sequencing, timing, and calibration of measures steering the deleveraging process generated these processes. Optimal deleveraging process demands that the Central Bank also focus on the stability of the financial system. This task should be a constitutional part of the third macro policy pillar, namely macroprudential policy.