International reserves in the CEE8 – lessons from the financial crisis

This Country Focus shows that some simple reserve adequacy measures (particularly based on external debt indices) – although suffering from a number of drawbacks – seem to be sound indicators of the largest vulnerabilities within the CEE8 region (EU Member States from Central and Eastern Europe). Nevertheless, the analysis of balance-of-payments flows also reveals that some other types of financial flows, normally not captured by the traditional simple measures (e.g. financial derivative flows), may also significantly affect the overall balance of payments – particularly at moments of heightened financial market tensions. As a result, a broader consideration of gross foreign liabilities beyond short-term external debt levels appears justified when analysing reserve adequacy, especially in countries where equity and bond markets are more developed and/or cross-border derivative flows are substantial.