112 

 Volume 1. Issue 2. July 2019 

ISSN 2603-5324 

http://faba.bg 

 

Sustainability of CEE on a Comparative Basis 

 

Peter Chobanov, Diyana Miteva 

 

Department of Finance, University of National and World Economy, Bulgaria 

 

Info Articles 

________________ 
History Articles: 

Submited 12 March 2019 

Revised 30 April 2019 

Accepted 1 July 2019 

________________ 
Keywords: 

financial stability, 

sustainability, investor 

compensation schemes 

Abstract
 

___________________________________________________________________ 

The actuality of the problems regarding the financial sustainability on national level is 

indisputable and attracts more and more attention. Underestimation the importance of 

the financial sustainability is one of the key factors that contributed for the high impact 

of the global financial and economic crisis on the development of the global economy 

and its participants. The results shown in current research paper are part of an UNWE 

project which deals with a comparative analysis of the countries in CEE in terms of 

their financial sustainability, which was finalized in 2019. The paper compares the 

economic instability and the financial sustainability indicators for CEE and draws 

conclusions and recommendations for the countries to obtain better level of 

sustainability and lower exposure to risks. 
 Address Correspondence:  

   1700 Studentski Kompleks, Sofia, Bulgaria 
 



 

Peter Chobanov, Diyana Miteva / Finance, Accounting and Business Analysis 1 (2) (2019) 

113 

INTRODUCTION 

 

The actuality of the problems regarding 

the financial sustainability on national level is 

indisputable and attracts more and more 

attention. Underestimation the importance of 

the financial sustainability is one of the key 

factors that contributed for the high impact of 

the global financial and economic crisis on the 

development of the global economy and its 

participants.  

The period of high economic growth prior 

to the crisis was not accompanied by prudential 

fiscal and economic policy and was 

characterized as a period of increasing 

indebtedness not only of the private but also of 

the public sector. The illusion that such period 

could last forever deterred buffers to be 

accumulated, and even became the reason for 

accumulation of imbalances which led to higher 

vulnerability and made the countries and their 

economic agents more susceptible to the crisis. 

The results shown in current research 

paper are part of an UNWE project, which deals 

with a comparative analysis of the countries in 

CEE in terms of their financial sustainability, 

and was finalized in 2019.  

CEE are facing a number of risks 

following the Global crisis. Those risks could be 

defined as follows1: Significant imbalances have 

been accumulated prior the crisis raising 

countries’ shock exposure; Current account 

deficit reaches unsustainable higher levels in 

countries with fixed exchange rate in 

comparison to countries applying inflation 

targeting. Romania and Hungary also report 

comparatively high levels of this indicator prior 

the crisis, which makes it difficult to be 

sustainably funded in long term.  

The current account deficit is covered 

with direct foreign investments in the years prior 

the crisis only in Bulgaria and Estonia. While in 

Latvia, Lithuania and Romania it is assessed as 

unsustainable in regard of deficit financing. 

                                                             

1 The conlusions are based  on the research of 
Chobanov, P. „The imbalances, risks and global the 
global crisis”, Propler, Sofia.  

After the crisis Hungary, Bulgaria and 

Czech Republic could not report significant 

growth rate, and the first two of them have 

permanent downturn of investments, which 

worsen the perspectives for a long term 

economic potential; 

Investment structure prior the crisis in the 

CEE is not particularly favorable as investments 

are mainly in real estates, as the highest share 

they have in the countries with fixed exchange 

rate. Only Czech Republic, Poland and Hungary 

don’t have high growth rate of the internal credit 

prior to the crisis. This development within the 

rest countries causes apprehensions about the 

stability of the banking system in a case of 

aggravation of the economic environment. The 

unemployment( particularly the youth one) is 

higher in countries with fixed exchange rate.  

The good experience of economic growth 

prior the crisis was not used for accumulation of 

fiscal buffers and the policy of the majority of 

the countries does not fulfil the rules of the 

stability and growth pact, where an exception is 

Bulgaria and Estonia; Countries with fixed 

exchange rate are with better fiscal discipline 

striving after fiscal consolidation; During the 

period 2002-2008 only Bulgaria and Estonia do 

not allowed twin-deficits which are considered 

to be a risky combination.  

Countries applying inflation targeting 

have higher government debt than those 

applying fixed exchange rate. The main part of 

literature concerning financial sustainability so 

far regards only some of the economic sectors, as 

it is not known a research on the sustainability 

on a comparative basis in other chosen countries 

from CEE to have been done. 

International institutions like IMF and 

EC pay attention to similar problems, but it is 

often limited to do fiscal sustainability.  

Following this risks and the research that was 

taken on them indicator for economic instability 

was designed as well as indicator for financial 

sustainability of investor compensation schemes. 

 

Economic instability indicator 

In order to assess the financial 

sustainability and compare its levels across CEE 



 

Peter Chobanov, Diyana Miteva / Finance, Accounting and Business Analysis 1 (2) (2019) 

114 

countries a possible decision is creating a 

common indicator. On Table 1 results of 

calculations on building up a common economic 

instability indicator are presented. 

The indicator for economic instability has 

the following components: Most significant 

decrease of the growth of the potential GDP 

after the crisis: Slowest recovery after the crisis; 

Lowest annual average growth of investments in 

the period 2011-2017; Lowest share of 

machinery and equipment in GDP after the 

crisis; Lowest rate change of the number of 

employed people after the crisis; Highest 

deviation of the labor costs growth of the 

productivity growth after the crisis; Highest 

average budget deficit after the crisis; Most 

negative combination of positive deviation of the 

potential GDP and budget deficit after the crisis. 

 

Table 1. Economic instability indicator 

Components/ 

Country 
1 2 3 4 5 6 7  8 total 

Bulgaria 1   1   1 1      4 

Czech Republic 

  

1 

    

   1 

Estonia 

 

1 

   

1 

 

   2 

Latvia 1 1            1 3 

Lithuania 1 

  

1 

   

   2 

Hungary 

     

1 

 

 1 2 

Poland 

   

1 

  

1    2 

Romania 

    

1 

  

 1 2 

Slovenia   1 1 1 1   1    5 

Slovakia 

      

1    1 

Eurozone 2 3 1 2 1 1 2  1 13 

Outside eurozone 1 0 2 1 2 2 1  2 11 

Source: own calculations. 

 

The higher the total points one country 

has the higher the risk of economic instability is. 

According to the results Slovenia, Bulgaria and 

Lithuania have the highest risk of economic 

instability. Two of the countries are in the 

Eurozone and Bulgaria is on its way to it as 

well.  

The countries of the Eurozone have 

higher indicator for a total instability where the 

risk of 4 of the components is higher: 1)potential 

GDP decrease in comparison with the period 

prior the crisis; 2) slower recovery after the 

crisis; 3) share of investments in machinery and 

equipment in GDP, 4) highest budget deficit 

after the crisis.  Those indicators give signals for 

midterm problem and therefore should be taken 

into consideration through economic policy 

measures.  

 

Financial sustainability of investor protection 

schemes and economic instability  

Within the research of the financial 

sustainability of CEE it was reviewed also the 

financial sector – banks and investor protection 

systems as part of the participants which are 

important for maintaining the financial stability 

of the countries. As part of the important 

authorities the sustainability of the investor 

protection schemes was tested. 2 An interesting 

fact would be to know the interrelation between 

the financial sector and economic sector and 

their comment sustainability. Therefor an 

indicator for the financial sustainability of 

investor protection schemes is build and is 

shown on Figure 1 together with the values of 

the economic instability indicator for CEE. 

The financial sustainability indicator 

includes the following 15 factors concerning 

mainly the financing and regulatory framework 

and structure and functions applied by the CEE: 

1) Opportunities of the protection schemes to 

raise money from the market (in case of 

insufficiency) ; 2) Coinsurance regulation – part 

of the losses are covered by the investors 

themselves which serves to decrease moral 

hazard; 3) Type of financing of the schemes - (ex 

ante , ex post) ; 4) Available resources – 

indicator for the financial stability of the 

scheme.; 5) Target level of the available resource 

                                                             

2 Investor protection schemes are institutions 
established on the grounds of the EU Directive 
97/19 and aim at providing protection for 
investors in financial instruments. The functioning 
and structure of these schemes is pretty much 
similar to the Deposit insurance schemes but they 
protect clients of investment companies and 
companies providing regulated investment 
services.  



 

Peter Chobanov, Diyana Miteva / Finance, Accounting and Business Analysis 1 (2) (2019) 

115 

in regard of the risk and potential payments – 

applying this model of financing decrease the 

risk of shortage of funds; 6)Administrative 

instalments – has small impact on the indicator 

but improves the financial sustainability; 7) Risk-

based approach of instalment determination – 

considered to be the more fair and financial 

stable approach of financing – the same is 

applied for deposit insurance system; 8) option 

for additional instalments to be raised if a 

shortage is met – increase the sustainability of 

the schemes; 9) State contributions in place – 

increases the trust and sustainability of the 

schemes; 

10) State guarantees - increase the sustainability 

of the schemes in a time of necessity of funds; 

11) Minimum level of capital – factor for a long 

term sustainability of the schemes; 12) 

Experienced with shortage of funds  – increases 

the risk of future financial instability; 13) 

Additional measures in place for coping with 

major defaults and payments – increases the 

sustainability of the schemes; 14) Subrogation in 

the liquidation procedures  of the failed 

investment company – increases the 

sustainability of the schemes;  15) Stress tests 

and crisis management measures – improves the 

sustainability and readiness for potential crisis 

events.  

The components of the financial 

sustainability indicator can vary from 0 to 3. The 

higher the value the more sustainable the 

country is. The final value of the sustainability 

indicator is varies in the same interval  from 0 to 

3, where each component has a weight and the 

total sum of the weights is 1.  

 

 

Figure 1. Financial sustainability and economic instability indicators 

Source: own calculations.  

 

The values of the financial sustainability 

indicator for CEE are between 0,26 and 1,65. 

Slovenia scores an extreme low value (0,26) 

which is due to the fact that there isn’t an 

independent investor protection scheme, but 

rather is just a bank account for funds to be 

raised, being financed ex-post (EC, 2010). The 

highest indicator is observed for Hungary (1,65), 

Poland (1,59) and Bulgaria (1,55Hungary has met a 

major case in 2014 which brought an entire new 

regulation which improved the regulative 

framework and established a new scheme part of 

the deposit insurance one. 

From Figure 1 some conclusions could be 

drawn. There is a sign that countries with higher 

economic instability values have low financial 

sustainability indicators too  which means that 

these countries have to introduce measures for 

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1

2

3

4

5

6

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0,5

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1,5

2

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Financial sustainability and economic instability 
indicators

Financial sustainability indicator Economic instability indicator

Linear (Financial sustainability indicator) Linear (Economic instability indicator)



 

Peter Chobanov, Diyana Miteva / Finance, Accounting and Business Analysis 1 (2) (2019) 

116 

increasing their sustainability if they want to 

protect themselves of future crisis events. Those 

are Slovenia and Latvia. Bulgaria on the other 

hand shows higher economic instability but 

proper financial sustainability of the investor 

protection schemes. Slovakia, Poland and 

Hungary have lower economic instability index 

and higher financial sustainability which 

indicates for a lower risk for these countries – 

meaning that here the indicators show similar 

results. 

 

CONCLUSIONS  

 

Prior the crisis significant imbalances 

have been accumulated which led to higher 

vulnerability of the countries to shocks. That 

resulted in significant impact of the crisis and 

sharp worsening of the main economic 

indicators.   

The reviewed economic indicators 

allowed to build up an economic instability 

index which identified Slovenia, Bulgaria and 

Lithuania as the riskiest countries.  

The eurozone countries have higher 

instability values. During the crisis they suffer 

higher cumulative decrease and need more time 

to return to the precrisis GDP levels. They have 

lower potential GDP growth. The fiscal 

discipline is worsen by the crisis and impact the 

eurozone countries with higher budget deficit. 

As a whole the dynamics of the economic 

factors under review is more volatile and triggers 

concerns in a midterm time.  

The fixed exchange rates and eurozone 

expansion have brought discipline for some 

countries prior the crisis. After becoming a 

member of the eurozone countries’risk of 

midterm economic stability seem to increase. 

As a conclusion it could be said that the 

financial sustainability of the investor protection 

schemes in the CEE is on a good level, but risk 

of shortage of funds exists, which could be 

decreased applying the recommended actions 

abovementioned.  

It is important to be noted that the 

analysis and conclusions are  made rather on a 

legislative basis and thus the low scores for some 

of the countries do not necessarily mean the 

risks their will happen, as if there are state 

measures in place the protection for investors 

could be secured, but there is still the risk that to 

be not fast enough and not effective in the time.  

The comparison between the countries of 

CEE allows to assess the risks for development 

and encourage measures for a wider and more 

stable basis for economic growth. 

 

REFERENCES 

 

Directive 97/9 of EC for the investor compensation 

schemes. 

Alternatives to investor compensation scheme and 

their impact, Directorate General For Internal 

Policies, Policy Department A: Economic 

And Scientific Policy, EP, 2012. 

European Parliament (2011): European Parliament 

legislative resolution of 5 July 2011 on the 

proposal for a directive of the European 

Parliament and of the Council amending 

Directive 97/9/EC of the European 

Parliament and of the Council on investor-

compensation schemes, P7_TA(2011)0313 

Commission staff working document, Impact 

assessment accompanying document to the 

Proposal for a Directive of the European 

parliament and of the council amending 

Directive 1997/9/EC on investor 

compensation schemes, 12.7.2010, p. 98