The Episodes of Currency Crises in the European Transition Economies

The series of currency crises which hit several developing countries in the 1990s did not leave the emerging market economies of Central and Eastern Europe unscathed. However, contrary to the experience of Mexico in 1995 and South East Asia in 1997-1998, the roots of the crises in our region were usually less sophisticated and easier to identify. Most crisis episodes in the former communist countries fit nicely with the ”first generation” canonical model elaborated in 1979 by Paul Krugman and developed in 1980s by other economists. In this model, fiscal imbalances are the main factor leading to depleting international reserves of the central bank and speculative attacks against national currencies. This was the main reason behind all currency crises in our region, very often closely related to serious microeconomic weaknesses and delays in structural and institutional reforms. The only minor exception was the Czech Republic where the devaluation crisis in May 1997 (of rather limited magnitude) was caused by over-borrowing of the enterprise sector, an unreformed financial sector, and political turmoil rather than by fiscal imbalances and an excessively expansionary monetary policy. This volume, following another collection of similar monographs related to Latin American and Asian regions, presents five episodes of currency crises in Eastern Europe in the second half of 1990s. Four of them were related to post-communist economies and one (Turkey) to a developing economy aiming to integrate with the EU and suffering many macroeconomic and structural weaknesses similar to those of the transition group. Bulgaria in 1996-1997 represents the first episode of a full-scale financial crisis, involving drastic currency devaluation and near-hyperinflation, a banking crisis and a near default on debt obligations. The roots of the crisis were fully domestic and, although severe, were restricted to Bulgaria. Russia's financial crisis in August 1998, despite similar characteristics and domestic roots as in Bulgaria, had an important international dimension. On the one hand, the first speculative attacks against the ruble in the fall of 1997 were triggered by crisis events in Asia, particularly in Hong Kong and Korea. On the other hand, when the Russian crisis erupted, it provoked a huge contagion effect across all the countries of the former USSR. It also caused a big turmoil on all segments of the international financial market, bringing the danger of a recession in the US and other developed countries, and triggering a currency crisis in Brazil few months later. The monographs on Ukraine and Moldova present two case studies of such a contagion effect. However, one should remember that these two economies (as well as most other FSU economies) experienced the same weaknesses and vulnerabilities as in Russia. Thus Russian events could only accelerate the crisis in these countries which was, in any event, hard to avoid. Finally, we present the analysis of the recent financial market crisis in Turkey, which fortunately has been stopped by fast and substantial IMF and World Bank support and has not evolved into a full-scale currency crisis.