Nicholas Watson in Prague -
It is said that when Germany catches a cold, Europe sneezes. So will Greece's nasty bout of influenza similarly affect the emerging economies of Southeast Europe?
Members of the Eurozone are worried about contagion from Greece's problems, but so too are governments across the Balkans, where Greece's €240bn economy is an important regional driver.
The most direct way for Greece's problems to impact its Balkan neighbours would be through intra-regional trade, which has boomed over the past decade as those emerging European economies opened up. Looking at the IMF Direction of Trade Statistics for 2008, Macedonia would be the relatively hardest hit, as Greece accounted for around 14% of exports and 9.5% of imports there. The next most-exposed country would be Albania, with Greece accounting for 11% of its exports and 10% of imports. This would be followed by Bulgaria with 8% of exports and 4.8% of imports derived from Greece.
A substantial amount of foreign direct investment (FDI) has also flowed from Greece into the relatively small, but increasingly open, Balkan economies over the past decade. Greek companies have invested significant amounts into various sectors of the Serbian economy such as banking, telecommunications and food processing: according to UniCredit Group, there are around 200 Greek companies operating in Serbia (and 200 more Serbian-Greek companies) and Greece is the number-two source of FDI in Serbia with around 14% of total FDI stock. Greece is also among the top investors in Bulgaria (number four with more than 8% of total FDI stock) and Romania (also with around 8%).
Despite the relatively large share of exports and FDI, analysts generally believe the direct consequences of a Greek slowdown shouldn't be too dramatic on the Southeast European economies. For example, Bulgarian trade represents slightly more than 30% of GDP, but the Greek share of this is less than 10%. "Exposure via the trade channel seems fairly limited, and even assuming a period of weak growth or recession in Greece, this is likely to have only a muted effect on the region," says Tim Ash of Royal Bank of Scotland.
Don't bank on it
A constant theme in the FDI data is the flows into the banking sectors of the Balkan economies and it is through this channel that analysts see the greatest risk from Greece's problems.
Like Austrian banks in Central Europe, Greek banks have reasserted their historic ties in the Balkans and aggressively expanded by buying up local banks and growing their balance sheets, particularly in the high-growth areas of consumer and mortgage lending. There are four Greek-controlled banks among the top-10 in Bulgaria, three in Serbia, two in Romania and one in Turkey. The size of the exposure can be seen in data from the Bank for International Settlements: as of June, Greek banks had around $57bn in loan exposure to emerging Europe, with Romania at $19bn, Turkey at $18.2bn, Bulgaria at $9.9bn, Albania at $1.9bn and Macedonia at $1.7bn.
Thus far, the Greek parent banks such as EFG Eurobank, Piraeus Bank and Alpha Bank appear fairly well capitalised and their participation last year in the so-called "Vienna Initiative," an IMF-coordinated agreement for western banks to stand by their Central and Eastern European subsidiaries, imply they won't cut and run.
However, the obvious concern remains that the rise in funding costs that Greek banks are experiencing as a result of the crisis there, could result in a liquidity squeeze at home, which even with the best will in the world won't prevent a draining of liquidity from their operations in the Balkans. "Southeast European banking markets have a generally high loan/deposit ratio - between 120% and 130% for all the countries except Turkey - and the funding gap is financed through foreign funding," UniCredit says in a research note. But "the era of cheap foreign funding is over."
Unless financing conditions for Greek banks improve and the rise in non-performing loans in many Balkan countries due to the crisis eases, these banks will almost certainly be very cautious about how they run their foreign affiliates. "This element will further contribute to the relatively poor credit growth outlook in Southeast Europe," says UniCredit.
Finally, Greece's manifest inability to run its economy according to the rules governing the single currency, the so-called Maastricht Criteria, could have knock-on effects for those wishing to join the euro. The strains that Greece is putting on the Eurozone may well cause some countries to re-evaluate their desire to quickly join the single currency (some like the Czechs didn't appear that keen even before the Greek problem blew up), while countries like Germany may be loath to admit other potential welshers into the club. Estonia is regarded as closest to becoming part of the 16-member Eurozone.
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