CRITICAL ANALYSIS OF STOCK MARKET STABILITY IN PORTUGAL, ROMANIA,

SLOVAKIA, SLOVENIA AND SPAIN

(Assignment towards partial assessment in the subject of Financial Markets and Regulatory

Systems )

SUBMITTED BY:

SHRIYA NAYYAR (944), SONAM JAMBHULKAR (874), PRANJAL MEHTA (871), ADITYA

PRATAP SINGH (894) & TANIYA KANWAT (946)

BUSINESS LAW HONOURS

VIII SEMESTER

SUBMITTED TO:

MR. RITUPARNA DAS, ASSOCIATE PROFESSOR, FACULTY OF MANAGEMENT

TOTAL WORDS: 14, 746

NATIONAL LAW UNIVERSITY, JODHPUR

WINTER SESSION

(JANUARY-MAY 2015)

IINTRODUCTIONNTRODUCTION & O & OVERVIEWVERVIEW OFOF S SUBJECTUBJECT M MATTERATTER

Financial markets play a fundamental role in the economic development of a country. They

are the intermediary link in facilitating the flow of funds from savers to investors. By

providing an institutional mechanism for mobilizing domestic savings and efficiently

channeling them into productive investments, they lower the cost of capital to investors and

accelerate economic growth of the country. Financial intermediation between borrowers and

savers is done by commercial banks. This credit market enables debt financing for

investments. An alternative method of intermediation is through equity financing. This is

only possible through the development of capital markets. Capital markets, which deal with

securities such as stocks and bonds, are associated with financial resource mobilization on a

long term basis. By raising capital directly from the public, they lower the cost of capital.

Capital markets also allow for wider ownership among the public, thereby distributing risks

and wealth amongst smaller investors. For investors, they provide an effective vehicle for

making investment choices which suit their own preferences of risk and returns based on

available information. As such, capital markets help the economy to generate more savings

and productive investments. A basic feature of an efficient capital market is constant

liquidity, an easy mechanism for entry and exit by investors. This requires sufficient volume

and size of transactions in the market (Tuladhar, 1996). The stock market forms a significant

component of the financial sector of any economy.

The proponents of stock markets emphasize the importance of having a developed stock

market in enhancing the efficiency of investment. A well-functioning stock market is

expected to lead to a lower cost of equity capital for firms and allow individuals to more

effectively price and hedge risk. Stock markets can attract foreign portfolio capital and

increase domestic resource mobilization, expanding the resources available for investment in

developing countries. Recognizing the importance of stock market on economic growth,

prudential authorities such as World Bank, IMF and ADB undertook stock market

development programs for emerging markets in developing countries during 80s and 90s and

they found that, emerging stock markets have experienced considerable development since

the early 1990s. The market capitalization of emerging market countries has more than

doubled over the past decade growing from less than $2 trillion in 1995 to about $5 trillion in

2005 (Yartey, 2008). As a percentage of world market capitalization, emerging markets are

now more than 12 percent and steadily growing (Standard and Poor, 2005). The stock market

is one of the most important sources for companies to raise funds. This allows businesses to

be publicly traded, or raise additional capital for expansion by selling shares of ownership of

the company in a public market. The liquidity that an exchange provides affords investors the

ability to quickly and easily sell securities. This is an attractive feature of investing in stocks,

compared to other less liquid investments such as real estate. History has shown that the price

of shares and other assets is an important part of the dynamics of economic activity, and can

influence or be an indicator of social mood. An economy where the stock market is on the

rise is considered to be an up-and-coming economy. In fact, the stock market is often

considered the primary indicator of a country's economic strength and development. Rising

share prices, for instance, tend to be associated with increased business investment and vice

versa. Share prices also affect the wealth of households and their consumption. Therefore,

central banks tend to keep an eye on the control and behavior of the stock market and, in

general, on the smooth operation of the financial system functions. Financial stability is the

raison raison d'être of central banks. Exchanges also act as the clearinghouse for each

transaction, meaning that they collect and deliver the shares, and guarantee payment to the

seller of a security. This eliminates the risk to an individual buyer or seller that the

counterparty could default on the transaction (en.wikipedia.org/wiki/Stockmarket 2010).1

General Determinants of Stock Market

Income Levels

According to the demand driven hypotheses, the increase in income will create new

demand for financial services. In support of this theory, Garcia and Liu (1999) found that

income level have positive effect on stock market development in a sample of Latin America

and Asian countries. In the same vein, Yartey (2008) using the modified Calderon – Rossell

model on a panel of data of 42 emerging market countries for the period 1990-2004 found

that income level determine stock market development in emerging markets. Other scholars

argue that the effect of income levels is not direct rather higher volume of intermediation

through stock markets cause higher real income growth. Higher income growth in turn

promotes development in stock market. As income increases, its cyclical component impacts

the size of the stock market and its price index. In addition, because of higher income

usually goes hand in hand with better defined property rights, better education and

better general environment for business, we expect it to have positive effect on stock

1 https://profiles.uonbi.ac.ke/jaduda/files/the_determinants_of_stock_market_developmentthe_case_for_the_nairobi_stock_exchange.pdf

market development (La Porta et al.,1996). On the other hand Nacuer et al., (2007) using

data from Middle East and North African countries found that high income does not promote

development in the stock market.

Macroeconomic Stability

Consistent with previous studies inflation has been used as a measure of macroeconomic

stability (Nacuer et al., 2007; Garcia and Liu, 1999). Macroeconomic stability has been

found to exert effects on stock market development; however, there is no consensus on

the nature of effects. For example, Nacuer et al., (2007) found that macroeconomic instability

has a negative and significant relationship with stock market capitalization. Boyd et al.,

(2001) found a non linear relationship between inflation and equity market

development such that as inflation rises, the marginal impact on stock market

development diminishes rapidly. Garcia and Liu (1999) using a pooled data of 15

industrial and developing economies and using three measures of macro economic

stability: change in inflation; current and last year change in inflation; and standard deviation

of current and last years 12 months inflation rate found no significant effect on stock market

development. In a similar study by Yartey (2008) no significant relationship between

inflation and stock market development was found.

Although there is no agreement on the relationship between macroeconomic stability

and stock market development, we argue that higher levels of macroeconomic stability

encourage investors to participate in the stock market largely because the investment

environment is predictable. Furthermore, macroeconomic stability influence firms

profitability, and so the prices of securities in the stock market is likely to increase. Investors

whose investments are experiencing a capital gain are more likely to channel their savings to

the stock market by increasing their investments, and so this will enhance stock market

development. 2

Stock Market Liquidity

Liquidity has been defined as the ease and speed at which economic agents buy and sell

securities in the stock market (Levine and Zervos, 1998). Indeed, research has been

conducted to determine whether stock market liquidity enhances stock market

development. Some scholars support the view that liquidity in the stock market is good for

2 The Macroeconomic Determinants of Stock Market Development in Jordan; International Journal of Economics and Finance; Vol. 5, No. 6; 2013.

the development of stock market (Levine and Servos, 1998; Yartey, 2008), while others argue

to the contrary (see for example Shleifer and Vishny, 1986; Garcia and Liu, 1999). In support

of positive relationship between stock market liquidity and stock market development, Yartey

(2008) argues that liquid markets affords investors access to their savings, and thus boost

their confidence in stock market investment. More importantly, the more liquid the stock

market, the larger the amount of savings that are channeled through the stock market, thus

enhancing the development of the market. In other words, with a liquid stock market,

investors may not lose access to their savings during the course of the investment

because investors can liquidate their investments easily, quickly and at lower costs

(Ngugi, 2003b; Bencivenga and Smith, 1991). In a similar vein, Bencivenga et al.,(1996)

argue that liquidity affect the choice of investments because liquid markets allow the

ownership of capital to be transferred economically, thus reducing transaction cost which in

turn favors the use of long term investments. In effect, liquid markets help improve the

resource allocation and induce more investors to invest in the stock market thus increasing

the capitalization of the market. Other researchers do not support a positive relationship. For

instance, Garcia and Liu (1999) argue that due to their liquidity, stock markets may hurt

growth since saving rates may reduce due to externalities in capital accumulation. In

addition, very liquid stock market encourage investor myopia because they can sell their

shares easily which weakens their commitment and incentive to monitor managerial

actions (Shleifer and Vishny, 1986). Indeed, weaker corporate governance resulting

from reduced monitoring of managers by shareholders impedes the development of stock

markets. It is important to point out; however, that theory is ambiguous about the exact

impact of greater stock liquidity on economic growth. By reducing the need for precautionary

savings, increased stock liquidity may have an adverse effect on the rate of economic growth

(Yartey and Adjasi, 2007). In this study, we expect liquid markets to relate positively with

stock market development. 3

Banking Sector Development

There is no consensus among researchers on the relationship between financial sector

development and economic growth. Some argue that banking sector development has a

positive effect on the economic growth (Berthelemy and Varoudakis, 1996; Christopoulos

andTsionas, 2004); while others suggest that banking sector may not be beneficial for

3 The determinants of stock market development in the Middle-Eastern and North African region; www.emeraldinsight.com/0307-4358.htm.

growth (Singh, 1997). This notwithstanding, it is also not clear on the relationship

between banking sector development and stock market development. Indeed, banking sector

is important in the economic development and more so in the development of stock

market because it affords investors with liquidity by advancing credit, and facilitating

savings. Nacuer et al.,(2007) and Garcia and Liu (1999) found support to a positive

relationship between banking sector development and stock market development. Yartey

(2008) also found support to a positive relationship; however, it was found that a very high

level of bank sector development may have negative effects because stock markets and

banks tend to substitute one another as financing sources. Indeed, stock markets and

banks are considered as competitors in providing finance and so with a well developed

money market, the capital market may be overshadowed leading to a slower rate of

development. 4

In this work, an analysis of the stock markets and determinants of stock market stability has

been made for 5 emerging European economies, i.e. Portugal, Romania, Slovakia, Slovenia

and Spain. Since each of these economies is emerging in the Global Market, the authors of

this work have paid emphasis on determinants of stock markets in emerging economies.

SLOVAKIA

4 Macroeconomic Determinants of Stock Market Development in Emerging Markets: Evidence from Kenya, Research Journal of Finance and Accounting, Vol 3. No. 5, 2012.

STOCK MARKET AND FACTORS CONTRIBUTING TO ITS STABILITY IN

SLOVAKIA

Slovakia is a sovereign state in Central Europe.5 The official language is Slovak, a member of

the Slavic language family. The financial market is the market with financial means that is

the one, in which some people are offering them and some are buying.6 The market is a place

where the sale and purchase of different products are realized. The product is any object

which is able to satisfy the needs or wishes of customers and can be offered in the market7.

The greater the products´ ability to meet wishes of buyers, the higher is their success. There

exist the real estate market, automobile market, grain market, labour market, stock market,

insurance market and many others.

Economy: The Slovak economy is considered an advanced economy. Slovakia transformed

from a centrally planned economy to a market-driven economy. Major privatizations are

nearly complete, the banking sector is almost completely in private hands, and foreign

investment has risen. Slovakia adopted the Euro currency on 1 January 2009 as the 16th

member of the Eurozone.

GROWTH OF EQUITY CAPITAL IN THE COMMERCIAL BANKS AND BRANCH OFFICES OF

FOREIGN BANKS IN SR 2014

Type of bank Equity capital (in EUR millions)

3.31.2014 6.30.2014 9.30.2014 12.31.2014

Subscribed

paid-up

subscribed

paid-up

subscribed

paid-up

subscribed

paid-up

Commercial Banks and Branch Offices of Foreign Banks Total 3,288.9

3,288.9 3,297.8

3,297.8 3,394.0

3,394.0 3,445.4

3,445.4

Commercial Banks - Total 1,756.7

1,756.7 1,756.7

1,756.7 1,839.0

1,839.0 1,849.0

1,849.0

5 Austrian Foreign Ministry", 3 June 2013, "UNHCR regional classification". UNHCR. 6 Chovancová, B. & et al. (2006). Financial Market-instruments, transactions and institutions, Bratislava:IURA Edition.7 Jílek, J. (2008). Financial Markets and Investment. Praha: Grada

of which:

  Banks without foreign capital participation 153.9 153.9 153.9 153.9 153.9 153.9 153.9 153.9

  Banks with foreign capital participation 1,602.8

1,602.8 1,602.8

1,602.8 1,685.1

1,685.1 1,695.1

1,695.1

Branch Offices of Foreign Banks */ 1,532.2

1,532.2 1,541.1

1,541.1 1,555.0

1,555.0 1,596.4

1,596.4

FACTORS AFFECTING STOCK MARKET OF SLOVAKIA:

In agreement with maintaining the “order” in the financial market, its subjects functioning on

a worldwide scale are liable, to a large or small extent, to a certain form of the regulation. It is

obvious that by setting the rules the indicated process does not end but goes on by a

supervision, i.e. by a permanent control of the adherence to these rules. If they are broken, the

supervision authorities have at their disposal adequate sanctions which must or can be

imposed to supervised subjects.8

1. Regulatory framework: Slovak private law is based on civil law. The corporate

governance framework has recently undergone a major revision as part of EU

harmonization efforts and a drive to incorporate the OECD Principles into Slovak

legislation.9 The Securities Center (SCP) performs all shareholder recordkeeping for

public companies in Slovakia. The SCP is a central registry, and interacts directly

with registered shareholders. Nominee ownership is not a recognized concept in

Slovakia. The only shareholders with ownership rights are those listed in the share

register at the Securities Center. Shareholders have a general right to attend the

General Meeting and the right to vote. Opportunity should be provided for

shareholders to ask questions of the board and to place items on the agenda at general

meetings, subject to reasonable limitations. Shareholders should be able to vote in

person or in absentia, and equal effect should be given to votes whether cast in person

or in absentia. Shareholders should be furnished with sufficient and timely

8 Monika Zatrochová, Rudolf Stejskal, Economic and legal aspects influencing the financial market in Slovakia, Problems Of Management In The 21stcentury Volume 3, 2012 126.9 Nieh, C.-C., Lee, C.-F. (2001) “Dynamic Relationship between Stock Prices and Exchange Rates for G-7 Countries”, Quarterly Review of Economics and Finance, Vol. 41, 477- 490.

information concerning the date, location and agenda of general meetings, as well as

full and timely information regarding the issues to be decided at the meeting.

2. Fiscal and exchange rate policies: It helps in controlling exchange rates, Foreign

exchange rate management is an inherent part of monetary policy. Therefore, central

bank independence is limited when the government determines foreign exchange rate

policy. If the central bank is independent and responsible for foreign exchange

management, its responsibility is clear. Responsibility of the government for foreign

exchange rate policy is a way of involving it in the responsibility for the

developments of the exchange rate, which is a politically sensitive issue in most

countries. There is a moral hazard for the government, particularly with an

independent central bank, which allows the government to pursue10, in the short-term,

an expansionary unbalanced fiscal policy without the short-term costs in terms of the

political “penalty” of exchange rate depreciation, slowing growth or increasing

inflation. This is particularly important in transition economies, where artificially

large corporations dominate as a heritage of communism and are particularly

politically entrenched. The third issue is the changing equilibrium exchange rate11.

Due to substantial cumulative inflation differential even in transition countries with

low inflation, peg presents issues of eroding external competitiveness unless the

structural adjustment is very quick.12 Fourthly, contagion effects exist in emerging

markets, but importance of domestic forces should not be underestimated.13. The fifth

group of issues is concerned with management of floating currency. It needs very

little explaining that there is a learning curve for both policy-makers and economic

agents, particularly with regard to signaling, intervention and relationship between

interest rates and the exchange rate.14

10 Beblavý, M. (1999b), “Rastie skutočne dolarizácia slovenskej ekonomiky?”, Finančné noviny, www.p67value.sk, June11 Almeida, A. a Goodhart, Ch. (1998), “Does the Adoption of Inflation Targets Affect Central Bank Behaviour?” In: Molina, J., Vinals, J. and Gutierrez, F. (eds.): “Monetary Policy and Inflation in Spain” Macmillan, London12 Canzoneri, M. and Diba, B. (1996), “Fiscal Constraints on Central Bank Independence and Price Stability”, CEPR Discussion Paper No. 1463, Center for Economic Policy Research, London13 Svejnar J. (1993), “CSFR: a solid foundation”, in Porter R. (ed.), “Economic Transformation in Central Europe: A Progress Report”, CEPR, London14 Beblavý, M. (2000), “Monetary policy”, in: A. Marcinčin and M. Beblavý (eds.): Economic Policy in Slovakia 1990-1999, CSMA and SFPA, Bratislava Bernanke, B. and Mishkin, F. (1997), “Inflation targeting: A new framework for monetary policy”, Journal of economic perspectives, no. 2, pp. 97 - 1 16.

3. Trade patterns15: This helps in Market stability. Domestic reforms spurred a

deepening of Slovakia’s integration into the world economy. The importance of

international transactions has increased even further over time.16 The average of

exports and imports in 2013 reached almost 90 percent of GDP. The different trend in

these two indicators suggests that Slovakia has remained specialized in more

downstream stages of production than regional peers have, and research shows that

the vulnerability of individual countries is heavily influenced by their position in

GVCs. Nonetheless, given its high degree of competitiveness, Slovakia has continued

to gain export market shares, which has translated into growing trade surpluses and

recently pushed the current account balance into positive territory as well. Trade

flows have become more affected by external variables than domestic ones.17

Domestic industrial production played a role in driving the cycle of real exports

before 2005. However, this relationship is not statistically significant in the recent

period and exports started to be driven more by FDI. Import cycles began to follow

shocks to euro area growth since 2005. This change probably reflects the fact that the

export-oriented sectors engaged in global supply chains are FDI-intensive and mainly

serve foreign consumers.18

4. Insufficient information19: Insufficient information affects the rational decisions on

assessing products in the financial market, obtain relevant information on the

corporation on a timely and regular basis. Slovakia has Stock Exchange Act,

Strategic management involves awareness of how successful and strong the

organization and its strategies are, how the effectiveness of these strategies might be

improved, and of how circumstances are changing.20 The important issues are: the

ability of the organization to add value in meaningful ways, which, exploit

organizational resources to achieve synergy and at the same time, satisfy the needs of

the organization’s major stakeholders, particularly customers and owners.21 The

studies of small manufacturing firms competing in a wide variety of industries suggest 15 Mateus, T. (2004) “The Risk and Predictability of Equity Returns of the EU Accession Countries”, Emerging Markets Review, Vol. 5, 241-266.16 Chen, Qianying, Andrew Filardo, Dong He, Feng Zhu (2014) “Global impact of US monetary policy at the zero lower bound,” The HKMA-FRBNY Joint Conference on “Domestic and International Dimensions of Unconventional Monetary Policy, March 20-21, conference draft.17 International Monetary Fund (2013) German-Central European Supply Chain—Cluster Report, IMF multi-Country report No.13/263.18 Luetkepohl, Helmut (2007) New Introduction to Multiple Time Series Analysis, Springer.19 Kim, K. (2003) “Dollar Exchange Rate and Stock Price: Evidence from Multivariate Cointegration and Error Correction Model”, Review of Financial Economics, Vol. 12, 301-31320 Porter, Michael E.: Competitive Advantage. Creating and Sustaining Superior Performance. The Free Press. New York 1985

that obtaining information on several aspects of specific environmental sectors

facilitates alignment between some competitive strategies and environments whereas

the frequency of scanning has no effect on such alignments.22

5. Regulatory service: Regulatory services help in decrease of the risk arising from the

incorrect investment, these are provided by regulatory authorities. Infinity Capital is

subject to supervision by the Securities Market Supervision of the National Bank of

Slovakia. Infinity Capital is defined as investment firm established as a joint-stock

company which has its registered office in the territory of the Slovak Republic and

whose scope of business comprises the provision of one or more investment services

to clients, or the performance of one or more investment activities on the basis of an

investment services license issued by the National Bank of Slovakia. The National

Bank of Slovakia issued an investment services license to Infinity Capital. It also

provides for investment restrictions, In general, mutual funds may only invest in the

following financial instruments, transferable securities being traded on regulated stock

market or a stock exchange from list of countries formed by EU member statesor

transferable securities being traded on other regulated stock market or a stock

exchange where it is being actively traded new securities´ offerings which will be

quoted on a regulated stock market or a stock exchange within one year participation

certificates of other mutual funds, money deposited on current accounts and term

accounts of banks up to 12 months money market instruments.23 Funds may not

invest in precious metals, not even in a certificate form. The quantitative

representation of individual groups of securities in the fund’s portfolio is subject to

special rules. Open-ended mutual funds generally face more investment restrictions

than closed-ended and special mutual funds.24

6. Legal form: There are various forms in stock markets that ascertain effective

supervision over the financial market.

21 Beal, Reginald M.: Competing Effectively: Environmental Scanning, Competitive Strategy, and Organizational Performance in Small Manufacturing Firms. In: Journal of Small Business Management, Jan 200022 Thompson, John L.: Strategic Management. Awareness and Change. International Thomson Business Press. London 199723 Slovakia – Regulation, <http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/funds-and-fund-management-survey/pages/slovakia-regulation.aspx#1.4>24 Regulatory Reporting, <http://infinitycapital.sk/EN/regulatory-reporting>

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Effect of Factors on Stock Market

SECURITIES MARKET SUPERVISION

The National Bank of Slovakia as part of its supervision of the financial market, performs

supervision of stock exchange, central depository of securities, issuers of securities,

Investment Guarantee Fund, collective investment, investment firms, takeover bids and

squeeze-out and public offer.26 The stock exchange is a joint-stock company with its

registered office in the territory of the Slovak Republic which operates a regulated market

and ensures related activities and which is authorized to perform these activities under a

licence issued by the National Bank of Slovakia. The central depository of securities of the

Slovak Republic (hereinafter „the central depository") is a joint stock company having its

registered office in the territory of the Slovak Republic which carry out the activities under

the Act on Securities and Investment Services.

FORECAST OF STOCK MARKET OF SLOVAKIA ON THE BASIS OF THE FACTORS AFFECTING

STOCK MARKET: SLOVAKIA STOCK MARKET (SAX) 

The Slovakia Stock Market (SAX) decreased to 237.40 Index points in March from 257.98

Index points in February of 2015. Stock Market in Slovakia averaged 225.69 Index points

25 Special Data Dissemination Standard, <http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>26 National Bank of Slovakia (2011). Evaluation of the Situation in Local Financial Markets during the yearof 2008. Bratislava: Publishing House – National Bank of Slovakia.

from 1995 until 2015, reaching an all time high of 507.98 Index points in March of 2005 and

a record low of 70.19 Index points in March of 2000. 

CONCLUSION

Slovak consumer lending market, in addition to banks, an important role is also currently

played by other providers, which are usually denominated as non-banking companies. On 24 th

March, 2015 a new notification came according to which the non-banking companies can

also give loan without obtaining a license from the National Bank of Slovakia or from other

state authorities, they only have to register in a so-called ‘creditors registry’ administered by

the NBS. This main obligation of a non-banking company, when compared with the licensing

procedures of other entities in the financial sector represented a significantly simpler entry to

the Slovak market, without the need for fulfilling more demanding procedures.27

The financial institutions are state-regulated companies which operate in the financial market

and have legal subjectivity. They are including also commercial banks and the central bank in

the territory of the Slovak Republic. The commercial banks are considered to be one of the

most important subjects in the financial system and receive an extraordinary attention.

Together with the central bank they constitute a bank system. The Central Emission Bank is a

managerial centre of the bank system. It manages other banks mainly by means of indirect

economic instruments. The total indebtedness of households in Slovakia measured by the

proportion of debts in their gross disposable incomes still belongs to the lowest one in the

27 Slovakia: licensing of entities providing consumer loans, < http://www.thelawyer.com/briefings/slovakia-licensing-of-entities-providing-consumer-loans/3033093.article> Last visited on 29th March, 2015

European Union. The higher the burden of incomes caused by installments the less resistant

are households to negative trends including the increase of unemployment or the growth of

credit installments caused by the rising interest rates.

SSLOVENIALOVENIA

STOCK MARKETS AND FACTORS AFFECTING THEIR STABILITY IN SLOVENIA

(Analysis of Slovenian Stock Markets between 1991-2015 i.e. Post Slovenian Independence)

I. THE REPUBLIC OF SLOVENIA- A BACKGROUND

Slovenia is a nation state on the Adriatic Sea, bordering Italy to the west, Austria to the north,

Croatia to the south and southeast, and Hungary to the northeast.28 It covers 20,273 square

kilometers (7,827 sq mi) and has a population of 2.05 million.29 It is a parliamentary republic

and a member of the European Union and NATO.30 Its capital and largest city is Ljubljana.31

The human settlement of Slovenia is dispersed and uneven.32

Historically, the current territory of Slovenia was part of many different state formations,

including the Roman Empire and the Holy Roman Empire, followed by the Austro-

Hungarian Empire. In October 1918, the Slovenes exercised self-determination for the first

time by co-founding the internationally unrecognized State of Slovenes, Croats and Serbs,

which merged that December with the Kingdom of Serbia into the Kingdom of Serbs, Croats

and Slovenes (renamed Kingdom of Yugoslavia in 1929). During World War II, Slovenia

was occupied and annexed by Germany, Italy, Croatia, and Hungary.33 Afterward, it was a

founding member of the Federal People's Republic of Yugoslavia, later renamed the Socialist

Federal Republic of Yugoslavia. In June 1991, after the introduction of multi-party

representative democracy, Slovenia split from Yugoslavia and became an independent

country.34 In 2004, it entered NATO and the European Union; in 2007 became the first

former Communist country to join the Eurozone, and in 2010 joined the OECD, a global

association of high-income developed countries.35

II. THE SLOVENIAN ECONOMY

A. An Overview

28 "About Slovenia: Republic of Slovenia", Government of Slovenia, Republic of Slovenia (Retrieved 24-03-2015).29  Europe beyond 2000: The enlargement of the European Union towards the East, p. 121, (Whurr Publishers. 1998).30 "About Slovenia: Republic of Slovenia", Government of Slovenia, Republic of Slovenia (Retrieved 24-03-2015).31 Id.32 Id.33 Oto Luthar, From Prehistory to the End of the Ancient World: The Land Between: A History of Slovenia, p. 15, (Peter Lang, ed., 2008).34 Ibid.35 Manoranjan Dutta, Historical Progression of the EU, The United States of Europe: European Union and the Euro Revolution, (2011).

Slovenia has a developed economy and is per capita the richest of the Slavic

countries.

With excellent infrastructure, a well-educated work force, and a strategic location

between the Balkans and Western Europe, Slovenia has one of the highest per capita

GDPs in Central Europe.

In March 2004, Slovenia became the first transition country to graduate from

borrower status to donor partner at the World Bank.36

Slovenia became the first 2004 European Union entrant to adopt the euro (on 1

January 2007) and has experienced one of the most stable political transitions in

Central and South-eastern Europe.

Slovenia was in the beginning of 2007 the first new member to introduce the euro as

its currency, replacing the Tolar.

In 2007, Slovenia was invited to begin the process for joining the OECD. It became a

member in 2012.37

Slovenia today is a developed country that enjoys prosperity and stability. Slovenia is

considered to have an established, competitive, and flexible economy, with a good

international position in almost all rankings. Despite obvious challenges it remains in

the fast lane, with GDP growth figures just over 6%. What really clinched Slovenia’s

place among modern, advanced, and competitive European economies was joining the

Euro area in 2007.

Central Europe has traditionally played a crucial role in Slovenian economic

interactions, so joining the European Union and Euro area represent major stimuli for

economic activities and determine the outlines of economic policies.

Because Slovenia is located at a regional crossroads, its main GDP growth is related

to export activities. In addition, GDP is also driven by robust investment and other

components of domestic demand. Nevertheless, import growth tends to exceed export

growth and, during times of slowdown in the broader European economy, exports also

slow down. When open and competitive economy merged with upbeat EU economies

and favorable international trends, Slovenia’s exports of goods and services bloomed.

The 2008 Economic Recession- Prospects for the Slovenian economy deteriorated in

the second half of 2008, on account mostly of shifts in the external environment, with

36 OECD Economic Surveys Slovenia, April 2013, available at http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf37 OECD (2011b), OECD Economic Surveys: Slovenia 2011, OECD Publishing, http://dx.doi.org/10.1787/eco_surveys-svn-2011-en.

major trading partners entering recession in mid-2008 and external loans becoming

less readily available. The flow of net foreign lending to domestic banks turned

negative in mid-2008 as a result of the spreading financial crisis and related tightening

in international inter-bank markets. As a result, the expansion of domestic bank loans

to domestic nonbank sectors has recorded a significant slowdown.38

The financial sector in Slovenia has not been spared the effects of the global financial

crisis. The market capitalisation of shares on the Ljubljana Stock Exchange declined

57 percent in 2008, and Slovenian banks, while not extensively involved in structured

instruments, are facing refinancing difficulties after years of rapid loan growth and the

strong expansion of business in Southeast Europe. Slovenia’s largest (and majority

state-owned) banking groups are still reporting profits, but at drastically lower

levels.39

Slovenia’s Banking Crisis: The economy is in a deep recession. Slovenia has been hit

hard by a boom-bust cycle, compounded by reform backlogs and the euro area

sovereign debt crisis. Slovenia is facing a severe banking crisis, driven by excessive

risk taking, weak corporate governance of state-owned banks and insufficiently

effective supervision tools. Major state-owned banks have been recapitalised several

times. Additional capital needs are expected but their amount remains uncertain as the

main results of earlier stress tests and due-diligence analysis have not been disclosed

and their assumptions are most likely outdated. The creation of the Bank Asset

Management Company to ring-fence impaired assets is welcome, but lack of

transparency and potential political interference pose risks. The corporate sector has a

severe debt overhang and some firms face insolvency, while existing insolvency

procedures are long and result in low recovery rates. Limited equity markets and the

backlog in the privatisation programme are hindering foreign direct investment,

whose increase would help smooth corporate deleveraging. An agreement on a list of

public assets to be privatised or managed by a new sovereign holding company is still

lacking.40

III. STOCK MARKET IN SLOVENIA

In Slovenia there is currently one organised securities market, The Ljubljana Stock Exchange

(LJSE). The LJSE is a subsidiary (after the takeover in 2008) of the Vienna Stock Exchange 38 OECD Economic Surveys Slovenia, April 2013, available at http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf39 Damijan, J. (2012), “What Went Wrong in Slovenia?”, OpEd in Die Presse, 8 September.40 Slovenia Faces 'Severe Banking Crisis': OECD, 9 April 2013, http://www.cnbc.com/id/100626252.

(VSE). Due to legal uncertainty in connection with a new takeover law coming into effect

during the takeover process, a court ruling has for the moment capped the VSE’s voting

rights at 50 percent (although the VSE held over 80 percent of the shares as of mid February

2009).41 At issue is whether the VSE will have to offer the same price to those shareholders

that did not accept the initial offer. It is expected that this legal issue will be resolved during

the course of 2009. A new management board member was appointed in February 2009.42

Regarding equities, the exchange operates three market segments: A prime market (7 stocks),

a standard market (18 stocks), and an entry market (61 stocks). KrKA accounts for over 41

percent of turnover, and the five largest stocks account for 75 percent of stock exchange

turnover.43 The entry market contains very low liquidity stocks. In addition to stocks, the

exchange also has listings for bonds, collective investment schemes, and structured products,

with only T-bills actually being traded. Trading volume has been very low recently, with only

about EUR 1 million of equities turnover per day. Besides the recent crisis, factors that have

been cited as reasons for low turnover are the low share of foreign portfolio investors of only

7 percent of stock market capitalisation, lack of sophisticated products and services, and high

direct and indirect state ownership in Slovenian companies. Big trades are almost always

done OTC.44

The main stock exchange index in Slovenia is the SBI20. The composition of the index is

described below. The SBI20 declined by almost 68 percent in 2008, and overall equity

market capitalisation fell below EUR 8.5 billion at the end of 2008.45

Data Table

  Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies (domestic

equities and exclusive foreign listings) - Equity excluding investment fund shares - Euro

(Securities exchange - Trading Statistics)

Period  value obs. status

41 Slovenia - Ljubljana Stock Exchange - Market capitalisation of listed companies (domestic equities and exclusive foreign listings) - Equity excluding investment fund shares – Euro, European Central Bank, available at http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E42 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of Slovenia (IMF Working Paper WP/07/229), Washington, September 2007 http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf43 Bems, Rudolf, and Piritta Sorsa, Efficiency of the Slovenian Banking Sector, IMF and OECD, October 200844 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of Slovenia (IMF Working Paper WP/07/229), Washington, September 2007 http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf45 Id.

↓

2013 5173 A

2012 4911 A

2011 - L

2010 - L

2009 8462 A

2008 8468 A

2007 11554 A

2006 2758994 A

Stock Market Regulation

In terms of regulation, the LJSE Rules are the key LJSE Act, which regulates the areas of

securities, securities issuers, member firms (23) and securities trading.46 The LJSE Rules

stipulate in particular the stock exchange market structure; conditions for listing, temporary

suspensions of trading and de-listings from the stock exchange market; obligations of

securities issuers; conditions for the admission of member firms and for termination of

membership; rights and obligations of member firms; monitoring of issuers and member

firms; and the exchange's measures related to issuers and member firms and rules on stock

exchange trading. The instructions and guidelines, adopted on the basis of the LJSE rules,

define principles and procedures laid down by the LJSE rules in more detail. These are:

Instructions for Regulated Market Issuers, Trading Instructions, Instructions for Admission

and Monitoring of Member Firms and BTS Traders, Instructions for Indices, Liquidity

Criteria, Price List and other Statistical Data.47

Clearing of Stock Trades

46 International Monetary Fund, Republic of Slovenia: Financial System Stability Assessment (IMF Country Report No. 01/161), Washington, September 2001 http://www.imf.org/external/pubs/ft/scr/2001/cr01161.pdf47 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country Report No. 04/137), Washington, May 2004 http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf

Slovenia has a single, centralised clearing/settlement company and securities register, the

Central Securities Clearing Corporation (KDD). KDD was established in 1995 and is a

privately owned institution, with its shareholders being the major market participants, namely

banks, stock-broking firms, fund management companies, and issuers. Whereas under the

Slovenian legislation any qualified institutions can clear LJSE trades, in practice all LJSE

trades are still cleared by the Slovenian clearing company KDD. This may change, however,

in connection with the takeover of the LJSE by the Vienna Stock Exchange, and the

increasing international integration of the Slovenian financial market. The shares for all

Slovenian companies have been dematerialised since 1999 and are held in KDD’s central

register. KDD records the legal owner of the shares and this is largely relied upon as the basis

on which company law enforcement and compliance is assessed.48

Equity Ownership and Corporate Governance

Equity ownership in Slovenia is widespread, primarily as a result of mass privatisation after

independence. Whereas favourable stock market developments over the past few years had

encouraged further equity investment, primarily through mutual funds, this trend was

reversed in 2008 as the stock market slumped. Also, as a result of the privatisation process,

share ownership in Slovenia is public, as all shares need to be registered in a public share

register maintained by the KDD Securities Depository. Corporate governance is a major

concern in Slovenia, due to the web of crossholdings among companies, including in the

financial sector, and the strong involvement of the state in the ownership of the financial and

the corporate sectors.49

Venture Capital

The venture capital market in Slovenia is considered to be underdeveloped. In the past five

years, there were only 23 venture capital investments – i.e. on average 4-5 investments per

year. In order to develop its venture capital market, the Slovene Enterprise Fund (SEF) is in

the process of establishing a public Venture Capital Company (First Venture Capital

Company, LTD). The Venture Capital Company will be managed by First Capital, LTD, a

Fund subsidiary company established in 2007.50 The latter will be responsible for the

functioning and use of the European Structural resources for SME equity financing through

48 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of Slovenia (IMF Working Paper WP/07/229), Washington, September 2007 http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf49 Id.50 Id at p. 64.

this public Venture Capital Company.51 First Venture Capital Company will operate within

principles of public-private partnership, co-operate with external experts in the assessment

procedures, and obtain supervision over the use of financial means for SMEs equity

financing.52

Exchange-Traded Derivatives

Currently, there are no organised derivatives and structured products markets in Slovenia.

One of the reasons appears to be the unfavourable tax treatment of derivatives, which

according to market participants attract 40 percent capital gains tax during the first year. A

number of derivatives, mostly warrants and certificates on five of the largest Slovenian

stocks, are, however, traded on the Stuttgart Stock Exchange in Germany. The BoS reports

selling pressure on the LJSE when the issuers of these products liquidate their hedging

positions, as for example in connection with knock-out levels on structured instruments being

breached.53

Recent reform measures

The major recent changes in regulatory policy were the consequence of the implementation

of EU directives. An important novelty at the LJSE is the possibility of remote access to the

Exchange trading system for member firms. Remote membership is intended for brokerage

firms who would like to trade on the LJSE electronic order book BTS through remote access,

enabled by the LJSE through the Internet. They can thus provide their clients outside of

Slovenia the opportunity to trade on the LJSE and enable them to directly enter the Slovene

capital market.54 To this end, the LJSE amended its Rules in 2007, which now allow for

remote access to the Exchange trading system. Remote trading has not yet taken off, though.

Besides current market conditions, the KDD clearing arrangements do not yet appear ideally

suited to online trading, as (1) currently the KDD retains the power to suspend remote

members clearing bank activities (in the case of a remote member default on delivering cash

or securities toward KDD), (2) the system of fiduciary accounts is not developed in Slovenia,

and (3) the KDD cannot act as a central counterparty. Enterprise issues in Slovenia, including

51 OECD (2012a), OECD Reviews of Innovation Policy: Slovenia 2012, OECD Publishing, http://dx.doi.org/10.1787/9789264167407- en.52 Tang, G. and C. Upper (2010), “Debt Reduction after Crises”, BIS Quarterly Review, Bank for International Settlements, September53 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of Slovenia (IMF Working Paper WP/07/229), Washington, September 2007 http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf54 Id.

in the financial sector, are covered more comprehensively in the report of the OECD Steering

Group on Corporate Governance.55

Performance of Stock Market

Notwithstanding Slovenia’s efforts to bring its securities market legal infrastructure in line

with EU directives, capital markets in Slovenia are not well developed by OECD standards.

Slovenia’s capital markets are extremely limited in both depth and liquidity, and perhaps as

a consequence, have a narrow, largely domestically focussed investor base.56 For example,

total market capitalisation of the LJSE remains small in absolute terms, standing at €8.5

billion (as at 31 December 2014), which represented 25.2 per cent of GDP and a sharp drop

from the 57.1 percent share recorded the previous year, when market capitalisation was just

under €20 billion. There were over 200 issuers listed on the Ljubljana Stock Exchange at the

time of the mass privatisations, but this number has steadily diminished over time. Owing in

part to some buyouts but also to the delisting of many smaller companies, there are now only

about 90 or so issuers in the listed equity markets (7 companies comprise the prime segment,

18 are in the standard segment, and 61 are in the entry segment).57

Slovenian companies mostly prefer bank loans as a source of funds, because it is relatively

cheap, so the bond market is largely undeveloped. While a handful of companies draw upon

55 Id.56 OECD Economic Surveys Slovenia, April 2013, available at http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf57 Id.

fixed-income instruments, many of the largest companies are funded directly by loans from

foreign banks, via domestic subsidiaries, foreign branches, or directly from abroad.58

Factors Affecting Stock Market Stability

1. Public ownership is large: The 10 largest listed companies are state owned.

Competition in the product market is not vibrant enough – notably as state ownership

is large and the Competition Authority has been lacking resources – to facilitate

economic adjustment.59

2. Banking Crisis: Slovenia is facing a severe banking crisis, driven by excessive risk

taking, weak corporate governance of state-owned banks and insufficiently effective

supervision tools. Major stateowned banks have been recapitalised several times.

Additional capital needs are expected but their amount remains uncertain as the main

results of earlier stress tests and due-diligence analysis have not been disclosed and

their assumptions are most likely outdated. The creation of the Bank Asset

Management Company to ring-fence impaired assets is welcome, but lack of

transparency and potential political interference pose risks.60

3. Foreign Direct Investment is low per cent of GDP: The corporate sector has a

severe debt overhang and some firms face insolvency, while existing insolvency

procedures are long and result in low recovery rates. Limited equity markets and the

backlog in the privatisation programme are hindering foreign direct investment,

whose increase would help smooth corporate deleveraging. An agreement on a list of

public assets to be privatised or managed by a new sovereign holding company is still

lacking.61

4. Limited Protection of Minority Shareholders : The scope of the stock market to

finance the economy is limited by the high degree of state ownership in the ten largest

listed companies and weak protection of minority shareholders. Privatisation

supported by the definition of a clear asset management strategy, better disclosure of

related-party transactions to enhance investor protection and further strengthening of

58 International Monetary Fund, Republic of Slovenia: Financial System Stability Assessment (IMF Country Report No. 01/161), Washington, September 2001 http://www.imf.org/external/pubs/ft/scr/2001/cr01161.pdf59 OECD Economic Surveys Slovenia, April 2013, available at http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf60 OECD (2012a), OECD Reviews of Innovation Policy: Slovenia 2012, OECD Publishing, http://dx.doi.org/10.1787/9789264167407- en.61 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country Report No. 04/137), Washington, May 2004 http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf

operational and financial independence of the Securities Market Agency would all

bolster financial deepening and improve overall market discipline.62

5. Ineffective Supervision by the Securities Market Agency (SMA) : A large share of

NPLs is attributed to LBOs. However, there are large-scale circumventions of rules in

this regard and many disclosures are not made.63

6. Poor Corporate Governance Norms: Another risk is related to weak corporate

governance in the context of extensive public ownership, notably in the banking

sector (about 40% of banking loans are issued by stateowned banks and more banks

are state-controlled). A weak framework for the governance of state-owned banks

(SOBs) in Slovenia is likely to have contributed to poor credit standards, excessive

risk taking by banks and misallocation of credit. Excessively favourable credit

conditions have underpinned unsustainable mergers and acquisitions, management

buy-outs or buy-outs of public shares at high market values. Moreover, preliminary

findings of the Slovenian Corruption Prevention Commission have recently pointed to

widespread credit misallocation, likely related to corrupt behaviour. The dominance

of state ownership appears to have undermined the quality of banking supervision by

the Bank of Slovenia, which did not take sufficient steps to prevent large and

connected exposures.64 Anecdotal evidence also indicates mismanagement of the

SOBs. As an example of credit misallocation, the two largest SOBs – Nova

Ljubljanska Banka (NLB) and Nova Kreditna Banka Maribor (NKBM) – extended

loans amounting to, respectively, 20% and 15% of their capital to Zvon Ena, a

financial holding company, which is currently under bankruptcy procedures. These

two banks have also been heavily exposed to major construction companies. They

appear to be among the least efficient in Slovenia, particularly on a profit basis. There

have been frequent changes in the composition of management and supervisory

boards of these banks and several chief executive officers have cited political

interference as one of the reasons for their decision to resign.65

62 OECD Economic Surveys Slovenia, April 2013, available at http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf63 Id64 Republic of Slovenia: Financial System Stability Assessment - Update (IMF Country Report No. 04/137), Washington, May 2004 http://www.imf.org/external/pubs/ft/scr/2004/cr04137.pdf65 OECD Economic Surveys Slovenia, April 2013, available at http://www.oecd.org/eco/surveys/Overview_Slovenia.pdf

ROMANIA

STOCK MARKETS AND FACTORS AFFECTING THEIR STABILITY IN ROMANIA

In 2013, Romania had a GDP (PPP) of around $386 billion and a GDP per capita (PPP) of

$19,397. According to CIA's The World Factbook, Romania is an upper-middle income

country economy. According to Eurostat, Romania's GDP per capita (PPS) was at 55% of the

EU average in 2013, an increase from 42% in 2007 (the year of Romania's accession to the

EU).66

After 1989 the country experienced a decade of economic instability and decline, led in part

by an obsolete industrial base and a lack of structural reform. From 2000 onwards, however,

the Romanian economy was transformed into one of relative macroeconomic stability,

characterised by high growth, low unemployment and declining inflation. In 2006, according

to the Romanian Statistics Office, GDP growth in real terms was recorded at 7.7%, one of the

highest rates in Europe. However, a recession following the global financial crisis of 2008–

2009 forced the government was forced to borrow externally, including an IMF €20bn bailout

program. GDP has been growing by over 2% each year since. According to IMF, the GDP per

capita purchasing power parity grew from $14,875 in 2007 to an estimated $19,397 in 2014.

Romania has one of the lowest net average monthly wage in the EU in 2013 of €387, and an

inflation of 3.7%. Unemployment in Romania was at 7% in 2012, which is very low

compared to other EU countries.

Industrial output growth reached 6.5% year-on-year in February 2013, the highest in the EU-

27. The largest local companies include carmaker Automobile

Dacia, Petrom, Rompetrol, Ford Romania, Electrica, Romgaz, RCS & RDS andBanca

Transilvania. Exports have increased substantially in the past few years, with a 13% annual

rise in exports in 2010. Romania's main exports are cars, software, clothing and textiles,

industrial machinery, electrical and electronic equipment, metallurgic products, raw

materials, military equipment, pharmaceuticals, fine chemicals, and agricultural products

(fruits, vegetables, and flowers). Trade is mostly centred on the member states of the

European Union, with Germany and Italy being the country's single largest trading partners.

The account balance in 2012 was estimated to be −4.52% of the GDP.

66 OECD Economic Surveys Romania, April 2014, available at http://www.oecd.org/eco/surveys/Overview_Romania.pdf

After a series of privatizations and reforms in the late 1990s and 2000s, government

intervention in the Romanian economy is somewhat lower than in other European

economiesIn 2005, the government replaced Romania'sprogressive tax system with a flat

tax of 16% for b. oth personal income and corporate profit, among the lowest rates in the

European Union.  The economy is predominantly based on services, which account for 51%

of GDP, even though industry and agriculture also have significant contributions, making up

36% and 13% of GDP, respectively. Additionally, 30% of the Romanian population was

employed in 2006 in agriculture and primary production, one of the highest rates in Europe.

Since 2000, Romania has attracted increasing amounts of foreign investment, becoming the

single largest investment destination in Southeastern and Central Europe. Foreign direct

investment was valued at €8.3 billion in 2006.  According to a 2011 World Bank report,

Romania currently ranks 72nd out of 175 economies in the ease of doing business, scoring

lower than other countries in the region such as the Czech Republic.  Additionally, a study in

2006 judged it to be the world's second-fastest economic reformer (after Georgia).

Since 1867 the official currency has been leu (Romanian leu), and following a denomination

in 2005, it has been valued at €0.2–0.3. After joining the EU in 2007, Romania is expected to

adopt the euro sometime around 2020.

Stock Market in Romania and determinants affecting its stability

The Bucharest Stock Exchange (BVB) the stock exchange located in Bucharest, Romania.

The total market capitalisation equals almost €30 billion ($33.5 billion) as of January 2015.

By January 2015, there were 83 companies listed on BVB's regulated market. In 2013, the

main indexBET went up by 26.1%, placing BVB as the 14th best performing stock exchange

globally. Since August 2013, Ludwik Sobolewski is the CEO of BVB.67

67 OECD Economic Surveys Romania, April 2014, available at http://www.oecd.org/eco/surveys/Overview_Romania.pdf

Beginnings of the history of the Bucharest Stock Exchange can be traced back to 1839, when

the commodities-trade exchanges were established in Bucharest. It was nevertheless only

until December 1st, 1882 that the BVB was officially inaugurated. One week later, the first

exchange rates begun being published in the Official Gazette. Throughout its existence, the

activities of the Bucharest Stock Exchange were affected by the socio-political events of the

time, such as the Romanian Uprising of 1907 or the Balkan Wars that took place between

1912 and 1913. The stock exchange was moreover closed during the First World War. When

BVB re-opened following the end of the war, it went through a period of 7 years of

significant growth, followed by a period of 7 years of accelerated loss. The activity of the

Market for Effects, Actions and Exchange was stopped in 1948, with the establishment of

the Communist regime in Romania and the beginning of the nationalisation process. At that

time, shares issued by 93 companies and 77 fixed-income instruments (bond type) were listed

on the Bucharest Stock Exchange. The Bucharest Stock Exchange reopened again in 1995,

after almost 50 years since it was shut down by the Communist regime. The first trading

session was carried out on November 20, 1995. On that date, 905 shares issued by 6 listed

companies were traded. In 2005, BVB absorbed RASDAQ – the over-the-counter electronic

stock market. On February 14th, 2008,Erste Bank listed on BVB and became the first

international company listed on the regulated market. Subsequently, Bucharest Stock

Exchange has experienced a continuous development and is now established as the main

stock exchange in Romania. In 2010, Bucharest Stock Exchange listed on its own spot

regulated market under the symbol BVB. In 2010, the Alternative trading system was

launched by BVB for SMEs and start-up companies wanting to raise capital from the market.

At the end of 2014, it was announced that the equities segment of the ATS market will be re-

launched under a new name 'AeRO' which stands for Alternative Exchange in Romania.

AeRO is scheduled to relaunch on February 25th, 2015 during an official opening of the

trading session. AeRO will target early stage companies, to finance their projects, growth

stories, increase their visibility and contribute to the development of the business

environment.  On December 15th, 2014 BVB has launched a new website, synchronized with

all the channels used by BVB, including social media pages. On March 27, 2015, BVB

announced that it was joining the United Nations Sustainable Stock Exchanges

initiative making it the 19th stock exchange to join. 68

The Bucharest Stock Exchange is a market and system operator authorized by the Financial

Supervisory Authority (FSA) that manages a Regulated market (RM) and an Alternative

Trading System (ATS) compatible with European standards. BVB also operates a market

section called RASDAQ. The following types of financial instruments are traded on BVB:

shares, rights, bonds, fund units, structured products and futures contracts. BVB operating

revenues are generated mainly from trading activity, from membership and listing fees, as

well as from data vending to various users.

Regulated Market

The main market of BVB is a spot regulated market where financial instruments such as

shares and rights (issued by international and Romanian entities), debt instruments

(corporate, municipality and government bonds) issued by Romanian entities and

international corporate bonds, UCITs (shares and fund units), structured products and ETFs

are traded.

In order to be listed on the regulated market, a company has to fulfill a number of

requirements prior to its listing on BVB:

Be a joint stock company (SA)

Have the value of market capitalization / shareholders’ equity of at least 1 million euro

68 OECD Economic Surveys Romania, April 2014, available at http://www.oecd.org/eco/surveys/Overview_Romania.pdf

Have a free-float of at least 25% (shares not owned by the company, nor by strategic investors)

Be active on the market for the last 3 years and have available financial reports from that period.

RASDAQ Market

RASDAQ market was launched in 1996 and it accommodates shares and rights issued by

Romanian entities coming from the mass privatization programme. In 1999, there were more

than 5,500 Romanian companies listed on RASDAQ. On September 30, 2014 the Romanian

Parliament decided that the RASDAQ market should be dissolved. The market still remains

operational however it is no longer possible to list on it. Companies listed on RASDAQ can

decide to promote to the regulated or ATS given that they fulfill the necessary admission

criteria.

Legal Framework

The legal framework for exchange operations in Romania is provided by the following legal

acts:

The Capital Market Law no. 297/2004

CNVM Regulation no. 1/2006 on Issuers and Operations with Securities

CNVM Regulation no. 2/2006 on Regulated Markets and Alternative Trading System

Additionally, the BVB is governed by Constitutive Act of the Commercial Company Bursa

de Valori Bucuresti S.A. and the Regulation on the Organization and Functioning of the

Bursa de Valori Bucuresti whereas the respective markets are governed by the Bucharest

Stock Exchange Rulebook for Market Operators and ATS Rulebook for System Operators.

Determinants of Stock Market69

Graff (1999) stated that there are four possibilities concerning the causal relationship between

financial development and economic growth: (1) financial development and economic growth

are not causally related. An example of this type of relation could be found in the

development of modern economy, in Europe, in the 17th Century. In this case, the economic

growth was the result of real factors, while the financial development was the result of 69 Romania- Market capitalisation of listed companies (domestic equities and exclusive foreign listings) - Equity excluding investment fund shares – Euro, European Central Bank, available at http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=181.SEE.A.SI.JSE0.MKP.W.E Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of Romania (IMF Working Paper WP/07/229), Washington, September 2007 http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf

financial institutions development. (2) financial development follows economic growth. In

this context, economic growth causes financial institutions to change and to develop, so as

both the financial and credit market grow. (3) financial development is a cause of economic

growth. In this case, there could be identified two possibilities, respectively: (a) financial

development is a precondition for economic growth; (b) financial development actively

encourages economic growth (see, e.g. Thornton, 1995). Provided that there are no real

impediments to economic growth, mature financial systems can cause high and sustained

rates of economic growth (see, Rousseau and Sylla, 2001). (4) financial development is an

impediment to economic growth. Similar to the previous posibility, causality runs from

financial development to real development, but the focus lies on potentially destabilizing

effects of financial overtrading and crises (see, e.g. Stiglitz, 2002) rather than on the efficient

functioning of the financial system. This view considers the financial system as inherently

unstable. The economic growth is a complex process that is influenced by more factors, other

than the capital market development. Moreover, capital market development is the results of

many influence factors.70

There are several interdependencies between these factors, which makes it difficult to

establish and isolate the causal relation between the economic growth and the capital market

development. There are several empirical studies that analyse the correlation between the

economic growth and the financial development. Calderon and Liu (2002), studying the

direction of this causality, conclude that, as a general trend, the financial development

generates economic growth, the causal relation being stronger in the emergent countries and

being explained by two channels: the fast capital accumulation and the growth of

productivity. Rajan and Zingales (1998) emphasize that the financial development is a

prediction element for the economic growth, because the capital market reflects the present

value of the future growth opportunities. The ex-ante development of the financial markets

facilitates the ex-post economic growth of the external financing dependent sectors. Levine

(1997) and Levine and Zevros (1998) consider that the capital market’s liquidity is a good

predictor of the GDP per capita growth and of the physical capital and productivity growth,

but other indicators of the capital market development such as volatility, size and

international integration are not significant for explaining economic growth. Carlin and

Mayer (2003) analyse the link between financial systems and economic growth for developed

countries and reveal a link between financial system and type of economic Quantitative

70 Id

Methods Inquires 68 activities which can influence the economic growth. Arestis,

Demetriades and Luintel (2001), use the autoregressive vector for an empirical analysis on

five developed economies; their study concludes that the capital market has effects on the

economic growth, but the impact of the banking sector is stronger. Filer, Hanousek and

Campos (1999) notice that capital markets include the future growth rates in current prices,

especially in the developed countries, which is a result consistent with the efficient markets

hypothesis. Although in cross-country analyses it can be depicted a correlation between the

financial development and the economic growth, we can question if, in the emergent

countries, an active capital market is a stimulating factor for the economic growth. An

affirmative answer would imply an important role of the public policies and international aid

targeted at introducing and maintaining the capital market structures (see Filer, Hanousek and

Campos, 1999). The previous empirical studies assessed and quantified the correlation

between capital market development and economic growth using different techniques4 . The

variables used in these studies can be grouped in the following categories: (A) Capital market

variables: - size variables: market capitalization/GDP ratio (used by Filer, Hanousek and

Campos, 1999), the logarithm of the stock market capitalization ratio5 (used by Arestis,

Demetriades and Luintel, 2001); - liquidity variables: turnover ratio6 and value traded ratio7

(used by Levine and Zevros, 1998) - volatility variables: eight-quarter moving standard

deviation of the end-of-quarter change of stock market prices (used by Arestis, Demetriades

and Luintel, 2001) (B) Economic growth variables: logarithm of real GDP (used by Arestis,

Demetriades and Luintel, 2001), GDP growth rate (used by Baier, Dwyer Jr. and Tamura,

2004), GDP per capita growth rate (used by King and Levine, 1993). 71

SPAIN71 Andritzky, Jochen R., Capital Market Development in a Small Country: The Case of Romania (IMF Working Paper WP/07/229), Washington, September 2007 http://www.imf.org/external/pubs/ft/wp/2007/wp07229.pdf

ASSESSING SPAIN’S STOCK MARKET, ITS DETERMINANTS AND FACTORS

CONTRIBUTING TO ITS STABILITY

Introduction

Overall, the rapid development in the market for credit risk transfer played a major role

altering banks’ functions. Structurally, securitization allowed banks to turn traditionally

illiquid claims (overwhelmingly in the form of bank loans) into marketable securities. The

development of securitization has therefore allowed banks to off-load part of their credit

exposure to other investors thereby lowering regulatory pressures on capital requirements and

raise new funds. The massive development of the private securitization market experienced in

recent years coincided with a period of low risk aversion and scant defaults. This resulted in a

number of shortcomings in firms’ risk management tools and models, which often used

default figures from this period and tended to underestimate default and liquidity risk. The

most prominent example is the securitization of mortgage loans which diversify idiosyncratic

risks but renders the underlying portfolio subject to macroeconomic risks including declines

in housing prices.72

A number of studies have analyzed the impact of securitization on financial stability from a

wider perspective. The broad idea is that the availability of credit risk transfer mechanisms

have changed banks’ role dramatically from traditional relationship lending-based to

originators and distributors of loans. This change has implications on bank’s incentives to

take on new risks.

However, the overall view prior to the crisis was that in addition to allowing lenders to

conserve costly capital, securitization improved financial stability by smoothing out the risks

72 Special Data Dissemination Standard, <http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>

among many investors. Indeed, a widely held view prior to the recent global credit crisis,

underlined the positive effect of securitization in diversifying credit risk across the financial

system, strengthening its overall resilience. From the perspective of individual banks

securitization was expected to be used to modify their risk profile by allowing them to

manage more effectively their credit risk portfolio geographically or by sector. Scant early

empirical evidence from the pre-crisis period also goes in this direction. It is argued that

securitization increases bank profitability and leverage while reducing overall insolvency

risk. Other studies also found a positive effect of securitization on bank performance. In

particular, banks more active in the securitization market were found to have lower solvency

risk and higher profitability levels and were better capitalized.

At the same time there were progressively more skeptical views on the impact of

securitization on the financial system stability. Some argue that by making illiquid loans

liquid securitization could increase, other things being equal, the risk appetite of banks. Risk

sharing within the financial sector through securitization can also amplify bank risks, they

also can increase systemic risk level shows that an the liquidity of bank assets attained to

securitization increases banking instability and the externalities associated with banking

failures, as banks have stronger incentives to take on new risk.

Lending and housing prices and securitization

An important feature in many countries is the role of securitization in the lending and housing

prices boom and burst. At the macroeconomic level, the dynamics of the relationship between

lending, housing prices and securitization have been largely unexplored although a rising

interest has emerged recently with the financial crisis. There is an empirical literature

studying the interaction of lending and housing prices both at the international and the

individual country levels.In addition the cyclical component of mortgage credit and its

interaction with property prices has been underscored, suggests that developments in the

financial sector such as securitization may have enhanced more ‘financial-sector-induced’

procyclicality than in the past creating higher probability for a meltdown.

Interestingly, most the evidence tends to suggest a strong impact from housing prices to

credit than from credit to housing prices. In this respect recent evidence has also shown that

subprime credit activity did not seem to have had much impact per se on subsequent housing

price returns for the US. On the other hand, securitization seems to have strengthened the

impact of housing prices on mortgage credit. This latter factor seems to be particularly

important in light of the recent crisis. In this respect there is mounting evidence suggesting

that securitization activity has led to laxer screening of borrowers in the years prior to the

crisis. The reasoning tends to be that by creating – informational – distance between the

loan’s originator and the ultimate bearer of the loan’s default risk, securitization can

potentially reduce lenders’ incentives to carefully screen and monitor borrowers. In other

words, the idea is that as securities are passed through from originating banks’ balance sheets

to the markets there might be more incentives for financial intermediaries to devote less effort

to screen borrowers. In the short term this would contribute to looser credit standards, less

credit-worthy borrowers than in the past were denied credit would be able to obtain it. In the

long term, this would lead to higher default rates.

The laxer screening of borrowers is typically linked to an expansion in the credit granted.

Indeed,– using comprehensive information broken down by US postal zip codes– it is shown

that securitization played an important role in the expansion of the supply of credit. In this

direction studying the evolution of credit quality in the US from 2000 to 2006 it is suggested

that lending standards declined more in areas that experienced larger credit booms and

housing price increases. They also find that lending standards declined more in areas with

higher mortgage securitization rates. Results suggest that existing securitization practices did

adversely affect the screening incentives. Analyzing the subprime lending they show that

conditional on being securitized, the portfolio with greater ease of securitization defaults by

around 10%–25% more than a similar risk profile group with a lesser ease of securitization.

These results suggest that screening and monitoring incentives may diminish with

securitization.

There is also evidence that securitization has quantitatively increase the amount of credit

granted making it less dependent on specific banking or monetary policy conditions. It is also

seen that the increasing depth of the mortgage secondary market fostered by securitization

has reduced the effect of lender financial conditions on credit supply. In line with this

hypothesis, it is found that, prior to the current financial crisis, banks making more use of

securitization were more sheltered from the effects of monetary policy changes. However,

their macro-relevance exercise highlights that the shock-absorber role of securitization on

bank lending could even reverse in a situation of financial distress.

Securitization, risk-taking and rating changes

A recent strand of the literature concentrates on the role that securitization has on risk- taking

and the determinants of the credit quality of the securities themselves. This is the area where

our paper aims to contribute by analyzing the determinants of rating changes also considering

the relationships between securitization, lending and financial instability addressed in the

previous sections.

Part of the most recent empirical literature questioned whether securitization activity makes

further acquisition of risk more attractive for banks. In a report by Krahnen and Wilde

(2006) an increase in the systemic risk of banks, after securitization.

Enhancement of risk appetite is also related to the regulatory capital arbitrage. Securitization

has often been used by banks to lower their regulatory needs for costly equity capital charges.

However banks may have an incentive to securitize less risky loans thereby lowering their

capital positions. This behavior derives from the existence of high capital standards to exploit

the benefits of securitizing assets to undertake regulatory capital arbitrage. Through

securitization, banks can potentially increase capital adequacy ratios without decreasing their

loan portfolios’ risk exposure. In other words, banks may securitize less risky loans and keep

the riskier ones. In one of the research, it is empirically showed that securitized loans have

experienced lower ex-post defaults than those retained in balance sheet.

Bank capitalization plays a role in this respect. It is suggested by the researchers that pooling

has an information destruction effect that is costly for the intermediary. This effect is reduced

if the intermediary’s private information is positively correlated across the assets. Hence if

the incentives of investors and banks are misaligned, banks -as originators- should also have

adequate capital so that warranties and representations can be taken seriously to avoid a bad

use of securitization. A more scant but very recent literature considers the dynamics of rating

changes in securitized deals. Rating agencies perform a unique role in this respect. Analyzing

downgrades, it is found that ABS downgrades have an impact on the originating bank

parent’s performance. There are evidences that ratings levels were less conservative around

the MBS market peak of 2005-2007. The involvement of rating agencies should go beyond

providing passive credit-quality certification and theoretically includes a more active

approach over the economic cycle. This is crucial for our analysis as large part of our

empirical analysis revolves around the issue of how rating changes of the underlying deals

are determined.

The Spanish case: a changing role for securitization

Little has been said or explored on a possible role for securitization in triggering lending in

countries that experienced a lending and housing bubble in the years before the crisis, such as

Spain. On the latter, housing prices in the years prior to the crisis have been particularly

noticeable in some European countries, the UK, Ireland and Spain -where housing prices

have increased by more than 180% only between 1997 and 2007- the largest growth among

major industrialized countries. Mortgage financing has also been the focus of the debate in

these countries.

The stock market index is as under:

PORTUGAL

ASSESSING PORTUGAL’S STOCK MARKET, ITS DETERMINANTS AND

FACTORS CONTRIBUTING TO ITS STABILITY

The assessment of market risk has long posed a challenge to many types

of economic agents and researchers (see, for instance, Granger (2002)

for an overview). Market risk arises from the random unanticipated

changes in the prices of financial assets and measuring it is crucial for

investors. Besides its interest to portfolio managers, the assessment of

market risk is relevant for the overall risk management in banks and

bank supervisors. Although bank failures are traditionally related with an

excess of non-performing loans (the so-called credit risk), the failure of

the Barings Bank in 1995 showed how market risk can lead to

bankruptcy. Furthermore, market risk has received increasing attention

in recent years as banks’ financial trading activities have grown.

Although the measurement of market risk has a long tradition in fi-

nance, there is still no universally agreed upon definition of risk. The

mod- ern theory of portfolio analysis dates back to the pioneering work of

Harry Markowitz in the 1950s. The starting point of portfolio theory rests

on the assumption that investors choose between portfolios on the basis

of their expected return, on the one hand, and the variance of their

return, on the other. The investor should choose a portfolio that

maximizes expected re- turn for any given variance, or alternatively,

minimizes variance for any given expected return. The portfolio choice is

determined by the investor’s preferred trade-off between expected return

and risk. Hence, in his seminal paper, Markowitz (1952) implicitly

provided a mathematical definition of risk, that is, the variance of

returns. In this way, risk is thought in terms of how spread-out the

distribution of returns is.

Later on, the Capital Asset Pricing Model (CAPM) emerged through the

contributions of Sharpe (1964) and Lintner (1965a, 1965b). Accord- ing

to the CAPM, the relevant risk measure in holding a given asset is the

systematic risk, since all other risks can be diversified away through

port- folio diversification. The systematic risk, measured by the beta

coefficient, is a widely used measure of risk. In statistical terms, it is

assumed that the variability in each stock’s return is a linear function of

the return on some larger market with the beta reflecting the

responsiveness of an asset to movements in the market portfolio. For

instance, in the context of interna- tional portfolio diversification, the

country risk is defined as the sensitivity of the country return to a world

stock return. Traditionally, it is assumed that beta is constant through

time. However, empirical research has found evidence that betas are

time varying (see, for example, the pioneer work of Blume (1971, 1975)).

Such a finding led to a surge in contributions to the literature (see, for

example, Fabozzi and Francis (1977, 1978), Sunder (1980), Alexander

and Benson (1982), Collins et al. (1987), Harvey (1989, 1991), Ferson

and Harvey (1991, 1993) and Ghysels (1998) among others). One natural

implication of such a result is that risk measurement must be able to

account for this time-varying feature.

Besides the time-variation, risk management should also take into ac-

count the distinction between the short and long-term investor (see, for

ex- ample, Candelon et al. (2008)). In fact, the first kind of investor is

naturally more interested in risk assessment at higher frequencies, that

is, short-term fluctuations, whereas the latter focuses on risk at lower

frequencies, that is, long-term fluctuations. Analysis at the frequency

level provides a valuable source of information, considering that different

financial decisions occur at different frequencies. Hence, one has to

resort to the frequency domain analysis to obtain insights into risk at the

frequency level.

In this paper, we re-examine risk measurement through a novel

approach, wavelet analysis. Wavelet analysis constitutes a very promising

tool as it represents a refinement in terms of analysis in the sense that

both time and frequency domains are taken into account. In particular,

one can resort to wavelet analysis to provide a unified framework to

measure risk in the time- frequency space. As both time and frequency

domains are encompassed, one is able to capture the time-varying

feature of risk while disentangling its behavior at the frequency level. In

this way, one can simultaneously mea- sure the evolving risk exposure

and distinguish the risk faced by short and long-term investors. Although

wavelets have been more popular in fields such as signal and image

processing, meteorology, and physics, among oth- ers, such analysis can

also shed fruitful light on several economic phenomena (see, for example,

the pioneering work of Ramsey and Zhang (1996, 1997) and Ramsey and

Lampart (1998a, 1998b)). Recent work using wavelets in- cludes that of,

for example, Kim and In (2003, 2005), who investigate the relationship

between financial variables and industrial production and be- tween

stock returns and inflation, Genc ̧ay et al. (2003, 2005) and Fernandez

(2005, 2006), who study the CAPM at different frequency scales, Connor

and Rossiter (2005) focus on commodity prices, In and Kim (2006)

examine the relationship between the stock and futures markets,

Gallegati and Gal- legati (2007) provide a wavelet variance analysis of

output in G-7 countries, Gallegati et al. (2008) and Yogo (2008) resort to

wavelets for business cycle analysis, Rua (2011) focuses on forecasting

GDP growth in the major euro area countries, and others (see Crowley

(2007) for a survey). However, up to now, most of the work drawing on

wavelets has been based on the dis- crete wavelet transform. In this

paper we focus on the continuous wavelet transform to assess market

risk (see also, for example, Raihan et al. (2005), Crowley and Mayes

(2008), Rua and Nunes (2009), Rua (2010, 2012), Tonn et al. (2010), and

Aguiar-Conraria and Soares (2011a, 2011b, 2011c)).

We provide an illustration by considering the emerging markets case.

The new equity markets that have emerged around the world have

received considerable attention in the last two decades, leading to

extensive recent literature on this topic (see, for example, Harvey (1995),

Bekaert and Harvey (1995, 1997, 2000, 2002, 2003), Garcia and Ghysels

(1998), Estrada (2000), De Jong and De Roon (2005), Chambet and

Gibson (2008), Dimitrakopou- los et al. (2010), among others). The fact

that the volatility of stock prices changes over time has long been known

(see, for example, Fama (1965)), and such features have also been

documented for the emerging markets. The time variation of risk comes

even more naturally in these countries due to the changing economic

environment resulting from capital market liberal- izations or the

increasing integration with world markets and the evolution of political

risks. In fact, several papers have acknowledged time varying volatility

and betas for the emerging markets (see, for example, Bekaert and

Harvey (1997, 2000, 2002, 2003), Santis and Imrohoroglu (1997), and

Estrada (2000)). Moreover, the process of market integration is a grad-

ual one, as emphasized by Bekaert and Harvey (2002). Therefore,

methods that allow for gradual transitions at changing speeds, such as

wavelets, are preferable to segmenting the analysis into various

subperiods. Hence, the emerging markets case makes an interesting

example for measuring risk with the continuous wavelet transform.

The Portuguese economy registered a lower decline in economic activity

during 2013 (-1.4%), in comparison to 2012 (-3.3%). The positive

performance of exports and a smaller contraction in domestic demand

and of investment were determining factors in this recuperation.

In the 3rd quarter of 2014, INE estimated an increase of 1.1% in GDP in

comparison to 2013. This was due to a more positive performance in

domestic demand, mainly reflected in the increase of private

consumption, meanwhile net external demand had a negative

contribution, due to the acceleration of the imports of goods and

services. We note, however, that exports of goods and services in volume

terms showed an annual growth of 2.9% in the 3rd quarter of 2014.

The projections from the Banco de Portugal (BP) point to a real increase

in the Portuguese economy of 0.9% in 2014, supported by the increase of

consumption and private investment, as well as by exports (+2.6%). The

combined current and capital balance should be positive in 2014, 2.6% of

GDP. For 2015-2016 GDP is forecast to grow 1.5% and 1.6%,

respectively, being above the projected for the Euro Zone by the

European Central Bank (1% and 1.5% respectively). The BP considers

that this development is because of an acceleration of GFCF as well as a

strong increase in exports (+4.2% in 2015 and +5% in 2016), favouring

the continuing surpluses of the current and capital balance, thus

enabling an improvement in the international investment position.

At the end of last April, in the “Medium-Term Budget Strategy“

(Documento de Estrate ́gia Orc ̧amental de Me ́dio Prazo - DEO), the

Government set out guidelines for public finances for the 2014-2018

period, wherein it advocates the continuation of the process of

adjustments in external imbalances and an effort in budgetary

consolidation.

In May 2014, the Government announced the end of the Economic and

Financial Assistance Programme - PAEF, (agreed with the EU and the

IMF in May 2011), without resorting to additional external financial

assistance thus gaining access to international debt markets. After three

years of the Programme, the Portuguese economy has made significant

progresses in the correction of a number of macroeconomic imbalances,

having implemented measures of a structural character in several areas.

According to the Banco de Portugal, the PAEF objectives were globally

met in certain aspects of the Portuguese economy, such as – the net

financing capacity in relation to the exterior that was registered in 2012;

the structural primary budget surplus in 2013, ongoing budget

consolidation, as well as the transfer of resources from the non-tradable

sector to tradable – were several of the favourable elements that

contributed to the process for sustainable growth.

International trade

According to data released by the Banco de Portugal, in the last five

years exports and imports of goods and services registered annual

average growth rates of 9.6% and 2.3%, respectively. In 2013, exports of

goods and services showed an increase of 6.8%, in comparison to the

previous year, and imports showed a slight increase of 1.5%. The trade

balance of goods and services was positive in 2013, inverting the

negative tendency registered in the last decade.

In the period January-September 2014, year on year, the increase of

exports of goods and services were 2.2%, while imports were more

significant, 4.1%, while the rate of coverage was around 104%.

With regards to exports of goods, these increased in 2013, year on year,

4.5%, according to INE data, while imports decreased 0.9%. The trade

balance of goods continues to show a deficit in 2013, although this has

happened for the third consecutive year (-13.6% in relation to 2012 and -

51% between 2009 and 2013).

According to the same source, in the period January-September 2014

exports and imports of goods registered an increase of 1.0% and of 3.5%

respectively, year on year (the rate of coverage was 82% in this period).

The trade balance of goods remained negative in this period of 2014.

In the first nine months of 2014, machinery and tools continue to be the

most exported products (14.5% of the total), followed by vehicles and

other transport material (11.1%), mineral fuels (8.3%), base metals

(8.0%) and plastics and rubber (7.4%). These five main product groups

represent about 49% of the total exported by Portugal during this period

(against 51% in the previous year).

The principal destination for exports of goods is the EU28 (71.5% of the

total in the January-September 2014 period), PALOP (7.6%) and NAFTA

(5.3%), being that the EU28 and NAFTA increased their quotas in

relation to the same period in 2013. Portugal’s main clients – Spain,

Germany, France, Angola and United Kingdom – together represent

around 60% of total exports in this period. The main clients remain

almost identical in relation to 2013, with the exception of China (10th

client) that gained importance in relation to Morocco that dropped out of

the TOP 10.

In relation to the imports of goods, mineral fuels, machinery and tools,

agricultural products, vehicles and other transport material and chemical

products lead the ranking of purchases made during the January-

September 2014 period, representing 64% of the total. The EU28 was the

origin of most of the products imported during this period with 74.2% of

the total (against 70.7% in the same period of 2013), being Spain,

Germany, France, Italy, the Netherlands the main suppliers, that

together represented 62% of imports. A special mention is made to the

arrival of Brazil in the Top 10 of suppliers, to the detriment of Russia,

and the increase in the positions of Italy, United Kingdom and China and

the decrease in the position of Angola.

CONCLUDING AND COMPARATIVE ANALYSIS

On the basis of the foregoing analysis we conclude as under:

Slovakia consumer lending market, in addition to banks, an important role is also

currently played by other providers, which are usually denominated as non-banking

companies. On 24th March, 2015 a new notification came according to which the non-

banking companies can also give loan without obtaining a license from the National

Bank of Slovakia or from other state authorities, they only have to register in a so-

called ‘creditors registry’ administered by the NBS. This main obligation of a non-

banking company, when compared with the licensing procedures of other entities in

the financial sector represented a significantly simpler entry to the Slovak market,

without the need for fulfilling more demanding procedures.

The financial institutions are state-regulated companies which operate in the financial

market and have legal subjectivity. They are including also commercial banks and the

central bank in the territory of the Slovak Republic. The commercial banks are

considered to be one of the most important subjects in the financial system and

receive an extraordinary attention. Together with the central bank they constitute a

bank system. The Central Emission Bank is a managerial centre of the bank system. It

manages other banks mainly by means of indirect economic instruments. The total

indebtedness of households in Slovakia measured by the proportion of debts in their

gross disposable incomes still belongs to the lowest one in the European Union. The

higher the burden of incomes caused by installments the less resistant are households

to negative trends including the increase of unemployment or the growth of credit

installments caused by the rising interest rates.

The Slovakia Stock Market (SAX) decreased to 237.40 Index points in March from

257.98 Index points in February of 2015. Stock Market in Slovakia averaged 225.69

Index points from 1995 until 2015, reaching an all time high of 507.98 Index points in

March of 2005 and a record low of 70.19 Index points in March of 2000. 

Slovenia- Notwithstanding Slovenia’s efforts to bring its securities market legal

infrastructure in line with EU directives, capital markets in Slovenia are not well

developed by OECD standards. Slovenia’s capital markets are extremely limited in

both depth and liquidity, and perhaps as a consequence, have a narrow, largely

domestically focussed investor base. For example, total market capitalisation of the

LJSE remains small in absolute terms, standing at €8.5 billion (as at 31 December

2014), which represented 25.2 per cent of GDP and a sharp drop from the 57.1

percent share recorded the previous year, when market capitalisation was just under

€20 billion. There were over 200 issuers listed on the Ljubljana Stock Exchange at the

time of the mass privatisations, but this number has steadily diminished over time.

Owing in part to some buyouts but also to the delisting of many smaller companies,

there are now only about 90 or so issuers in the listed equity markets (7 companies

comprise the prime segment, 18 are in the standard segment, and 61 are in the entry

segment).73

Portugal- The Portuguese economy registered a lower decline in

economic activity during 2013 (-1.4%), in comparison to 2012 (-

3.3%). The positive performance of exports and a smaller

contraction in domestic demand and of investment were

determining factors in this recuperation. In the 3rd quarter of

2014, INE estimated an increase of 1.1% in GDP in comparison to

2013. This was due to a more positive performance in domestic

demand, mainly reflected in the increase of private consumption,

meanwhile net external demand had a negative contribution, due to

the acceleration of the imports of goods and services. We note,

however, that exports of goods and services in volume terms

showed an annual growth of 2.9% in the 3rd quarter of 2014. The

73 Id.

projections from the Banco de Portugal (BP) point to a real increase

in the Portuguese economy of 0.9% in 2014, supported by the

increase of consumption and private investment, as well as by

exports (+2.6%). The combined current and capital balance should

be positive in 2014, 2.6% of GDP. For 2015-2016 GDP is forecast to

grow 1.5% and 1.6%, respectively, being above the projected for

the Euro Zone by the European Central Bank (1% and 1.5%

respectively). The BP considers that this development is because of

an acceleration of GFCF as well as a strong increase in exports

(+4.2% in 2015 and +5% in 2016), favouring the continuing

surpluses of the current and capital balance, thus enabling an

improvement in the international investment position. At the end of

last April, in the “Medium-Term Budget Strategy“ (Documento de

Estrate ́gia Orc ̧amental de Me ́dio Prazo - DEO), the Government set

out guidelines for public finances for the 2014-2018 period,

wherein it advocates the continuation of the process of adjustments

in external imbalances and an effort in budgetary consolidation.

Spain- Overall, the rapid development in the market for credit risk transfer played a

major role altering banks’ functions. Structurally, securitization allowed banks to turn

traditionally illiquid claims (overwhelmingly in the form of bank loans) into

marketable securities. The development of securitization has therefore allowed banks

to off-load part of their credit exposure to other investors thereby lowering regulatory

pressures on capital requirements and raise new funds. The massive development of

the private securitization market experienced in recent years coincided with a period

of low risk aversion and scant defaults. This resulted in a number of shortcomings in

firms’ risk management tools and models, which often used default figures from this

period and tended to underestimate default and liquidity risk. The most prominent

example is the securitization of mortgage loans which diversify idiosyncratic risks but

renders the underlying portfolio subject to macroeconomic risks including declines in

housing prices.74

Finally, the market capitalizations of these 5 Euro Zone members compare as under:

74 Special Data Dissemination Standard, <http://dsbb.imf.org/pages/sdds/DQAFBaseCollapsed.aspx?ctycode=SVK&catcode=SPI00>