Abstract
This paper examines the bilateral clearing agreement established in response to the separation of Czechoslovakia. The theoretical characteristics of bilateral clearing systems are identified and a model is applied to the agreement's netting, valuation and credit mechanisms. For each country, the utility of the bilateral arrangement depended on its ability to (1) maintain bilateral imports and (2) preserve convertible currency resources. Because adherence to the Czech and Slovak Clearing Agreement (CSCA) was asymmetric, the ability of bilateral arrangements to deter unilateral measures is questionable. The CSCA experience may also explain the lack of a wider use of bilateralism to deal with the transition in eastern Europe.
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