The paper presents an analytical discussion and empirical evidence on
the adjustment of financial markets to the stabilization and reforms i
mplemented in a transition economy, emphasizing the role of liquidity
constraints. Different types of equilibria, associated with different
financial structures, can emerge after reforms. The paper argues that
a key role during the transition is played by private, trade credit ma
rkets. The functioning of the latter requires the existence of a minim
um set of market institutions, that can impose credible penalties and
rewards for 'good' behavior.