Financial Markets Case Study

The Impact of The Global Economic and Financial Crisis on Central, Eastern and
South-Eastern Europe: A Stock-Taking Exercise
Financial Markets
7:20P-8:50P TTh
Submitted by:
Ersan, Kayla Mae
Frias, Ela
Gimang, Keith
Moncay, Krizel July
Ramizo, Gwyneth
Submitted to:
Mr. Ralph Benjie Austral
August 22, 2019

I. Introduction
Capital markets impact economic growth, creation of jobs and raise the material
standard, serving as an important source of finance for companies. They also build the
country’s investment base and are significantly connected to other social and economic
facets. Limited knowledge of investors, trust, illiquid assets, institutional environment,
transparency, perceived correlation with global capital markets have a strong influence
over the future of stock market development in a country.
Stock markets in Central and Eastern European (CEE) countries significantly

collapsed during the financial crisis of 2008. More recently, the financial crisis affected
global economies in most unpredicted ways: governments reached for deep amounts of
financial aid, stock exchange indices took large reductions, the once hopeful growth rates
in the emerging markets were suddenly swept away. Due to the ties with the emerging
and newly added markets to the European Union Central Europe was also affected, as a
part of emerging markets.
Integration of capital markets in a post-financial crisis setting is of particular

importance, as countries attempt to attract cross-border capital, and reduce business´
dependence on banks as a source of financing. The integration allows for deployment of
capital into those assets that are most productive, increases the liquidity of the capital
markets and reduces the cost of transacting. By examining the correlation and integration
movements of the selected capital markets, we will try to identify diversification
opportunities for international investors with the aim of lowering the investment risk.
II. Problem
In the issue in the CEE is the declining level of investors’ confidence in local
financial markets. Generally during panic among investors, risking emerging markets
loose popularity against ‘safe’ assets like gold and American treasury securities.
This problem happened after a period of strong expansion of economies across

the world, in 2007 a crisis burst out in the real estate sector of the United States. With the
collapse of Lehman Brothers in 2008 the crisis soon became global. Initially, it primarily
affected the advanced economies of the United States and Western Europe, but the
spillover of the crisis was unexpectedly powerful. The financial crisis has hit the various
Member States of the European Union to a different degree.
The global financial crisis affected the real economy in Central and Eastern
European Union countries such as Czech Republic, Romania and Bulgaria through two
main perspectives. First, the credit squeeze affected borrowing conditions for firms and
households with subsequent adverse effects on domestic investment and consumption
demand. Second, the downturn in the global economy, affected export demand severely.
And lastly, this problem indicates that other equity and bonds market of other European
countries are relatively small compared to those in the western European countries.
III. Alternatives
Confidence in European financial markets are the main driver encouraging cross‐
border retail and institutional investment flows, thus boosting integration. Efficient
functioning of financial markets is important for it provides resources for the prosperity of
the society’s economic system which can be achieved by promoting investor’s confidence
on the financial market. This can be achieved through these alternatives/solutions:
Investor protection
Investor confidence is an essential component in the efficient functioning of capital

markets, and one way to restore it lies in the consolidation of investor protection. The
lack of effective implementation of best execution duties is another important source of
concern and should be properly addressed in order to protect investors’ interests at
institutional and retail levels.
Better Transparency
Material information should be more easily to investors and should be readily

available to regulators and financial authorities. A periodic flow of valuable and relevant
information should be assured.
Market Efficiency
The efficient functioning of financial markets allows easier and cheaper access to
capital for firms, in order to boost employment and growth. Investment alternatives, easy
access to capital and investor protection may stimulate market efficiency and provide
more opportunities to increase social welfare.
IV. Solution
Investor protection mechanisms need to be in place to handle crisis,

misrepresentation by intermediaries and institutions. This includes strict KYC (Know Your
Customer) filings to ensure the money flowing into the investment is clean and not of
doubtful origin. All these would help sustain investor interest in the long term. Credit rating
for the cross-border listings and regional corporate bond issuances will be essential to
develop investor interest. That may help filter out the companies with questionable
governance and doubtful disclosures. A credit guarantee system to protect those
providing cross-border credits, just like India’s credit guarantee for banks, may boost
regional lending by protecting lenders from possible defaults.
In addressing the protection of the investor is through a protected fund. Protected

fund is a type of mutual fund that promises to return at least some portion of the initial
investment to an investor. The protected initial investment, plus some capital gain, will be
returned as long as the investor holds the original investment until the end of the
contractual term. The idea behind this type of fund is that you will be exposed to market
returns because the fund is able to invest in the stock market, but you will have the safety
of the guaranteed principal.
V. Conclusion and Recommendation
Conclusion
Before the crisis, the CESEE region was experiencing an economic boom with
rapid GDP and credit growth, which in turn was driven by large capital inflows and
benefited from strong global growth and easy global liquidity conditions. In addition,
strong economic growth in the region was supported by positive expectations of EU
convergence and euro adoption.
As the crisis occurred, looking at the impact on different financial market segments,
exchange rates were strongly affected, stock markets piled up huge losses and bond
spreads, while becoming more volatile. The crisis also had a major impact on capital flows
to the region, although the magnitude of the impact differed again remarkably, depending
on the type of capital inflows and the receiving country. Despite some temporary capital
outflows, the worst-case scenario of a fully pledged financial meltdown did not occur.
In particular, FDI inflows and inter-company loans played a positive role in

stabilizing capital flows to the region. Banking sectors experienced a deceleration in credit
and deposit growth, but the currency composition of credits and deposits hardly changed
for the region as a whole. While banks in the region have become confronted with an, in
some countries substantial, increase in non-performing loans and a decline in profitability,
banking sector capitalization remained at high levels.
Since the outbreak of the crisis CESEE authorities have also taken a range of non-
standard monetary policy measures to stabilize financial markets and reduce spillovers
to the real economy. We conclude that these results could be good starting point in
decision making for those who are planning to invest in the CEE capital markets. On the
other hand, the initiatives towards capital market integration in CEE should be supported,
which will reduce benefits of diversification for portfolio investors.
Recommendation
We recommend that there should be an implementation of investor protection

because the investors are the pillar of the financial and securities market. They determine
the level of activity in the market. They put the money in funds, stocks, etc. to help grow
the market and thus, the economy. Therefore, it is very important to protect the interests
of the investors. Investor protection involves various measures established to protect the
interests of investors from malpractices.
VI. References
Aiyer, S. (2016). Capital Market Integration in South Asia: Realizing the SAARC
Opportunity. Retrieved August 21, 2019 from https://www.sciencedirect.com
/topics/economics-econometrics-and-finance/investor-protection
Chen, J. (2018). Mutual Fund Essentials. Retrieved August 21, 2019 from
https://www.investopedia.com/terms/p/protectedfund.asp
Gardo, S., & Martin, R. (2010). The impact of the global economic and financial crisis on
central, eastern and south-eastern Europe: A stock-taking exercise. Retrieved
August 21, 2019 from https://www.econstor.eu/bitstream/10419/154567/1/ecbo
p114.pdf
Securities and Exchange Board of India (2019). Investor Protection Measures. Retrieved
August 21, 2019 from https://www.fincash.com/l/investor-protection-measures-
sebi

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The Impact of The Global Economic and Financial Crisis on Central, Eastern and

South-Eastern Europe: A Stock-Taking Exercise

Ersan, Kayla Mae

Moncay, Krizel July

Mr. Ralph Benjie Austral

August 22, 2019

Stock markets in Central and Eastern European (CEE) countries significantly

Integration of capital markets in a post-financial crisis setting is of particular

This problem happened after a period of strong expansion of economies across

Investor confidence is an essential component in the efficient functioning of capital

Material information should be more easily to investors and should be readily

Investor protection mechanisms need to be in place to handle crisis,

In addressing the protection of the investor is through a protected fund. Protected

In particular, FDI inflows and inter-company loans played a positive role in

We recommend that there should be an implementation of investor protection

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