Are the Central and Eastern European Transition Countries still vulnerable to a Financial Crisis? Results from a Multivariate Logit Analysis

The aim of the paper is to analyse the determinants of financial crises in a sample of nine transition countries in Central and Eastern Europe with a modified logit model. The modification takes explicitly into account the rare event characteristic of a currency crisis. Our results suggest that it is possible to explain the occurrence of crises with only a small number of macroeconomic variables. The variables which contribute positively to the probability of a crisis are: i) the ratio of the current account deficit to GDP; ii) the ratio of the budget deficit to GDP; iii) the change in currency reserves; iv) the amount of real appreciation of the currency relative to a trend, and v) the change in exports. Short-term debt by banks, which played a key role in the history of the Asian crises, was not an important factor in the build up of the crisis potential in Central and Eastern Europe.