engleski

Financialization in CESEE Countries - The Story of Debt vs. Equity

The recent financial and economic crisis resulted in a sudden stop of capital inflows to Central Eastern and Southeastern (CESEE) countries which had adverse economic implications for these small open economies. The purpose of this paper is to analyse the composition of capital flows in CESEE countries and examine whether this composition could be connected to various macroeconomic volatilities during the recent crisis. Analysis has shown that debt types of investment constituted the majority of capital stock in analysed countries, increasing considerably during the pre-crisis period, and that it was this type of capital that constituted the largest proportion of the ensuing sudden stops. Moreover, the debt component has historically exhibited noticeably higher volatility levels than the equity component in all CESEE countries, which was especially emphasized during the crisis. Further analysis has exposed adverse implications of such composition of capital inflows. The study confirmed the hypothesis that a higher pre-crisis share of debt in total capital flows is associated with the intensity of capital reversals during the crisis, more severe recessions and higher volatility of total capital flows. Results obtained in this study indicate the danger and potential risks of excessive debt inflows during periods of economic expansion for small open economies in terms of financialization and financial integration, highlighting the need to make efforts to strengthen the domestic financial and regulatory system.

Capital inflows, CESEE countries, debt and equity flows, financialization, sudden stops

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