Financial crises in south east Europe causes, features and lessons learned

This paper analyzes systemic financial crises in three Southeast European countries, Albania, Bosnia and Herzegovina and Croatia (ABC). Albania's crisis involved the informal financial sector (pyramid schemes). Bosnia's crisis did not have a defining set of events, but instead involved permanent stress and an eternally unfinished reform agenda. Croatia's crises included a first crisis resulting from transition and war, and a smaller second crisis resulting from liberalization without an adequate institutional and legal framework. We argue that there were common features of these disparate episodes. The crises were very costly, politics was involved in each case, the legal system was partly inadequate and there was a lack of coordination between the supervisory authorities and other institutions. The positive common feature is that none of the ABC countries inflated its way out of the crisis. We argue that several lessons may be learned: political consensus is essential for speedy resolution, early design of a crisis resolution plan and strong crisis management are crucial, there is no “one size fits all” policy for crises and strong fiscal position is a plus. Finally we should be glad to have financial crisis, as it is only after a crisis that additional effort is made to improve the stability of the financial system.