The Bulgarian Financial Crisis of 1996–1997: A Crisis of Transition

Essay , 2009 , 10 Pages , Grade: A

Economics - Economic Cycle and Growth

Since the fall of communism in the end of 1989 Bulgaria has been experiencing severe economic difficulties. In 1996 the problems of the country’s transition culminated in one of the most severe banking and currency crises in Eastern Europe – the Bulgarian financial crisis of 1996-1997. The main objectives of this paper are to outline the structural vulnerabilities that led to the crisis, to identify the key characteristics of the “twin” crisis and to analyze the rent-seeking nature of Bulgarian transition.
I will argue that the crisis was an outcome of a moral hazard problem in the Bulgarian economic agents’ behavior and the inadequate and unsustainable policies of the government in the period 1990-1997. The legacies of state-controlled economy were too slow to be overthrown and structural reforms were by and large not implemented up until 1997.

Inhaltsverzeichnis (Table of Contents)

• Introduction
• Economic and Institutional Background: 1990 – 1996
• The Twin Crisis: 1996 - 1997
• The Solution: Currency Board Arrangement
• Analysis of the causes of the crisis

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This paper examines the Bulgarian financial crisis of 1996-1997, analyzing the structural vulnerabilities that led to the crisis, the key characteristics of the "twin" crisis, and the rent-seeking nature of Bulgaria's transition.

• The crisis was a result of a moral hazard problem in Bulgarian economic agents' behavior.
• Inadequate and unsustainable government policies in the period 1990-1997 contributed to the crisis.
• The legacies of the state-controlled economy were slow to be overthrown.
• Structural reforms were not implemented until 1997.
• The crisis highlighted the challenges of transitioning from a centrally planned economy to a market-based economy.

Zusammenfassung der Kapitel (Chapter Summaries)

The Introduction lays out the paper's objectives and argues that the crisis was a consequence of moral hazard and inadequate government policies. The chapter "Economic and Institutional Background: 1990 – 1996" details Bulgaria's unfavorable starting position in the transition, highlighting the persistence of old behavior patterns and the lack of effective solutions to state enterprise problems. The "Twin Crisis: 1996 - 1997" chapter describes the bank runs and currency crisis, emphasizing the role of low foreign reserves, fear of deposit freezes, and unsustainable government policies. The "Solution: Currency Board Arrangement" chapter outlines the implementation of a currency board, its effectiveness in restoring confidence, and the accompanying reforms to strengthen the banking system. The "Analysis of the causes of the crisis" chapter further explores the moral hazard problem and its underlying structural issues.

Schlüsselwörter (Keywords)

The paper focuses on the Bulgarian financial crisis of 1996-1997, examining its causes and consequences. Key themes include moral hazard, rent-seeking behavior, inadequate government policies, structural reforms, and the transition from a centrally planned economy to a market-based economy. The paper also explores the role of the currency board arrangement in stabilizing the economy and restoring confidence.

• College: Central European University Budapest
• Grade: A
• Author: Blagoy Kitanov (Author)
• Publication Year: 2009
• Pages: 10
• Catalog Number: V155141
• ISBN (eBook): 9783640673698
• ISBN (Book): 9783640673377
• Language: English
• Tags: Bulgarian, Financial, Crisis, Transition