Presentations
LECTURE OF PLAMEN ORESHARSKI AT THE DISCUSSION ON “CRISES AND BULGARIA – THROUGH THE EYES OF THE PAST” ORGANIZED ON THE OCCASION OF THE 130TH ANNIVERSARY OF THE ESTABLISHMENT OF THE MINISTRY OF FINANCE
RETROSPECTIONS OF TWO FINANCIAL CRISES
Plamen Oresharski
Doctor of Economics
1. The roots of today's financial and economic crisis were laid yet in the remote 1986 when financial deregulation started. As always in similar cases, the rational border is quickly crossed. In this particular case, it was symbolically crossed at the late 1990s when the legal distinction between investment and commercial banking was eliminated. These processes were accompanied by speedy financial innovations, with large-scale expansion of derivative, synthetic and hybrid financial instruments. A financial environment was created, where greed gradually prevailed over fear and yet in the first years after 2000 the neglect of risks fully dominated investment decisions. The exaltation from the fact the money could be made from nothing, combined with the wide practice of "powdering" the balance-sheets, i.e. assigning value to assets which we call toxic today, and the liberal maintenance of acceptable ratings of financial institutions in a pre-bankruptcy state added to a picture the main aspects of which were unjustified investment optimism and boundless trust in the miracles of financial engineering.
The adjustments today are deep and painful. The old over-regulated world is disappearing although we do not still see the outlines of a different financial and economic architecture.
2. The new Bulgarian history has witnessed an even deeper financial and economic crisis - the one from 1996-97 - naturally in local dimensions. Its preconditions also fit, in a paradoxical and quite indirect way, in the global changes. When at the beginning of 1990s the triumph of neoliberal models also moved to the closed and highly centralized until then Soviet Block our country launched market-oriented reforms which were, in their form, deregulated. The focus of changes was again on the financial sector. The newly established commercial banks extended credits with a neglect of risks similar to the situation with the US mortgages in the recent years. The participants in the emerging capital market were born as financial pyramids. The latter used the names of modern financial instruments without having any grounds for that - again a situation quite similar to the development of the events in the leading markets from the period preceding the bankruptcy of Leman Brothers. External similarities were complemented by the lack of regulation of a number of financial instruments and whole segments of the financial markets, by the lax requirements to reporting and by the delayed reactions of the central supervision institutions. And of course, adjustments were quick to appear in the form of an extremely deep banking, monetary and economic crisis.
3. At the beginning of 1997 we were all aware, as we are today, that the old economic world was vanishing but we still did not see the outlines of the new financial and economic structure. The situation was even worse - stabilization was to be achieved first and after that the structures, institutions and regulations were to be constructively built up and developed. Surprisingly for most foreign observers our country recovered in an extremely short period in comparison with analogous processes in other emerging markets. The explanation for this rests with the successful combination of the stabilization measures applied, some of them being definitely non-standard and inconsistent with the concept techniques and policies established at that time.
The main tool was the abundant, directly by the Central Bank, crediting of the budget intended to refinance the maturing huge domestic debt in a period when the general public was encouraged to believe that the Central Bank had stopped financing anyone. That action provided the market with the required liquidity following the dramatic devaluation of the local currency and at the same time shrank in practice the domestic debt through its monetization and subsequent cancellation after the liquidation of the Central Bank and its opening as a Currency Board, and preserved the fragile confidence of the public in the new level of the exchange rate and hence - in the local currency. Of special importance is the fact that the use of that tool as well as of the other extraordinary measures and instruments was properly scheduled in time and was duly terminated which enabled the free market natural forces to start operating.
Today, 12 years later, it is amusing to watch how monetization of bad debts and instruments of leading international banks continue to be the adequate response to the existing financial imbalances. And if the reaction of the central monetary and fiscal authorities had been even quicker, then the dimensions of today's global crisis would probably have been smaller.
Even stronger is the conclusion for the inappropriateness of any full transparency of entirely professional operations of the fiscal and monetary authorities. If we talked less and worked more at the beginning of the turbulence in the financial markets, maybe the outcome would have been the same - smaller dimension of today's global crisis.
4. The above conclusions are not aimed at opposing any established rules of conduct. They only illustrate the fact that a considerably wider range of instruments, including non-standard ones, are admissible in extraordinary situations such as today's large-scale economic crisis.
The stronger interventions by central monetary and fiscal authorities in periods of crisis might assist the process of market balance recovery. If, however, the period of their validity is over extended, as was the case after the Great Depression from the first half of the last century, then the system will take other forms of imbalances. In this context, the expected new economic order will probably not take place if the extraordinary interventions are not dozed in intensity and phased in time. This is the most favorable development and exit from the crisis. Otherwise, we can anticipate a long-term unstable wave of fluctuations in the global economic development.
