radovan jelasic : effects of the financial crisis on central and eastern europe speech by mr radovan jelasic, governor of the national bank of serbia, at the " global crisis in europe and central asia " panel discussion of the imf and wb spring meeting, washington, 24 april 2009. * * * dear ladies and gentlemen, central and eastern europe has gone through an unbelievable development during the last two decades in all aspects : politically, economically and socially. but the financial crisis has thrown much of that progress into doubt. some brave but at the same time unpopular steps urgently need to be taken by the governments of the region. if these choices are not made immediately, the region ’ s macroeconomic and social stability will be at risk. democracy, during the next couple of months, will undergo its first major test since the beginning of transition. first, most cee countries, including serbia, greatly underestimated and are still underestimating the problems they will face in 2009 and 2010, as our economic models – built on foreign direct investments, foreign borrowing and, for the regional members of the european union, additional funds from brussels – need a complete overhaul. today ’ s problems cannot, and should not, be solved just by relying on financing from the imf, wb and eu. instead we need a long overdue adjustment, with fiscal and structural reforms, including pension, healthcare and education reform for which imf and wb should play a key role. “ premature welfare states ” as janos kornai would call it, based on now scarce and expensive foreign funding, nose - diving fdis and reduced budgetary incomes, are going to face an abrupt end all over the region. second, banks that are majority owners of the cee ’ s banking sector are hesitating to take the support of their respective governments as well as the ifis. the level of exposure in the cee region is definitely not commensurate with the level of recapitalization carried out up till now. in the meantime, the banking sector was never ever more important than at this crucial junction of the transition process. now its time to prove if mark twain was right by saying that bankers are people who offer you an umbrella when the sun is shining and want it back when it is raining. the so - to - say “ taking away of the umbrella ” is taking place despite the fact that margins are at the level not seen during this decade! third, regulators in

is, wrong! learning from the bad experiences of the large - scale crisis, our main job as central banks and educators will be to explain to the investors that the primary role of the credit rating agencies is to give an opinion and direction on the creditworthiness of a debt issued or issuer. the rating does not provide complete guidance on other aspects essential for investment decisions, such as market liquidity or price volatility. accordingly, as we are all aware, bonds with the same rating may have very different market prices. despite this fact, and even though each rating agency has its own rating methodologies and scales, market participants have often treated similarly rated securities as generally the same. our job is also to underline the responsibility of the investors in estimating the risk exposure of the debt issue. furthermore, we should direct and highlight to the professional investors the importance of developing their own risk management function, not solely taking into account the opinion of the rating agency, but going deeper and fully understanding underlying assets and risks. long periods of rapid economic growth worldwide resulted in the narrowing of focus towards high financial gains – circumstances which gave the potential to constantly create new types of hybrid financial instruments that majority of the market did not fully understand – in some cases, not even the sophisticated financial analysts and not even the regulators themselves. more importantly, the instruments were sometimes not completely and clearly understood by the institutions that we have all looked to for proper interpretation – the rating agencies. the primary lesson of this crisis is that we can no longer rely on other market participants, and we must both individually and on national level invest significantly in financial education. in an increasingly globalized world, the possibility for localized problem solving becomes more and more difficult and we must put additional effort on taking pre - emptive action in the future. the experience has taught us that efficiency and effectiveness of measures that are justified by future possible outcomes is only productive when communicated with well - informed and properly educated market participants. financial institutions should have a responsibility to provide clients with information that clearly and accurately represents the terms and conditions associated with the products they offer. for example, effective interest rate ( eir ) should allow consumers of financial services to find out the actual cost of a financial product. on macroeconomic level effective interest rate is important to provide efficient allocation of money and capital. the task of a loan officer has to be to explain to the consumer that eir includes all the credit payments and costs payable by the financial services consumer ( e.