The increasing discussion of a Greek exit from the euro prompted new fears about its impact on Greeces neighbours in southeastern Europe last month. With the EUs attention focused elsewhere, a financial crisis was brewing that could be equal in magnitude not for global markets but for the countries in the region to any Spanish fallout from a Greek exit.
Greek banks account for large chunks of the banking sector in southeastern Europe, particularly in Bulgaria (28% of total assets) as well as in Serbia and Romania (both around 16%). In Romania, the largest Greek banks average loan-to-deposit ratio is approaching 250%, according to research from Barclays. It was looking more likely than ever last month that these subsidiaries might be nationalized by already fiscally constrained governments or else turned into bridge banks administered and propped up by the local central banks.
|On the edge|
|Average loan-to-deposit ratios of largest Greek banks at end 2011|
|Source: Barclays Capital|
"Thanks to regulatory pressures by the local authorities, there has been a reduction in the proportion of funding of Greek banks subsidiaries from their parent banks," says Erik Berglof, chief economist at the European Bank for Reconstruction and Development. "However, many of these banks still cant function without parent funding; the government might need to step in if Greek parent banks were suddenly unable to maintain funding of these international subsidiaries."
National Bank of Greece said last month that it was setting up a separate holding company (part of which it might sell) for its southeastern Europe operations excluding Turkey. In the event of nationalization, Berglof says the EBRD might participate in a subsequent sell-down by the local authorities of the subsidiary banks, to help them go to new private-sector owners.
Nevertheless, adding to the risks of runs on deposits, there is concern that local authorities seizing control of local subsidiaries with a view to selling them to new owners later might face challenges on the grounds that it contravenes common-market regulation.
"There is no easy precedent for smooth bailouts at national level of local subsidiaries of cross-border banks within the EU," says Gunter Deuber, head of CEE research at Raiffeisen. He points in particular to the bailout in 2008 of Fortis by the Belgian, French and Dutch governments. "It would be even more difficult to find a mutually beneficial solution for the Greek banks subsidiaries if a new government in Greece was confrontational towards the EU," he says.
According to research at Nomura, policymakers from southeastern Europe at the EBRD annual meetings last month said they were making contingency plans to manage messy deleveraging by Greek banks, including via capital controls. But Romania and Bulgarias status in the EU might make it harder for them to monitor and slow cross-border flows.
The EU and IMF might have to tolerate some degree of short-term capital controls. But if Greece were to exit the euro, the fear is that the EU authorities might be too busy sorting out Italy and Spain to worry about southeastern Europe. In 2008 and 2009, the ECB was in any case reluctant to provide euro liquidity for Romania and Poland, especially when compared with how quickly the US Federal Reserve provided dollar liquidity to Mexico and South Korea.
Rapid and clear support from the IMF might therefore be crucial in the event of a Greek exit. Investors would likely flee local currencies if overleveraged banks had to be rescued by these governments. The Romanian leu and Serbian dinar fell to record lows last month. The state already controls about 20% of banks in Serbia, says Deuber. Separately to the problem with Greek banks, the government in Serbia has already sought IMF approval for an injection of 100 million of state capital later this year into the countrys second-biggest lender, Komercijalna Banka.
One way to prevent runs on the banks and a wider collapse in the banking sectors in these countries might be to dedicate a portion of IMF funding to help the local subsidiaries of Greek banks. In Greece itself, the Financial Stability Fund approved a 18 billion capital injection for the four biggest banks on May 22. IMF programmes are already in place in Romania and Serbia, and the fund is thought to be making preparations across southeastern Europe to help countries cope with a Greek exit from the euro.
But Romanias government lost a confidence vote in late April and inconclusive elections in Serbia in May raised the possibility of another weak coalition government. As in Greece, popular discontent with economic conditions and austerity measures has led to political instability that might slow the provision of desperately needed IMF support.
Berglof says it was reassuring that, to the end of May, there had been no big deposit outflows from Greek banks subsidiaries in southeastern Europe despite the parent banks having faced outflows in Greece. But even if Greece elected a relatively EU friendly government in elections on June 17, and even if it retained the euro, worries would persist and Greek banks subsidiaries in southeastern Europe would still be a drag on growth in these countries.
Local managers of Greek banks in southeastern Europe have been doing their best to keep their banks in business, perhaps in the hope of finding buyers. Raiffeisen closed an acquisition of Polbank, the Polish subsidiary of Greeces EFG Eurobank, at the end of April. But in contrast to Poland, countries such as Bulgaria are lower on the list of priorities even for banks focused on the region. UniCredit, for example, owns the largest bank in Bulgaria yet says it is focusing on growth primarily in Poland, Russia, Turkey and, to a lesser extent, Romania.
In the absence of any developed capital markets, economic growth in southeastern Europe is particularly dependent on banks. Loan growth in the corporate sector in Bulgaria and Romania last year was healthy (6% and 11% respectively), according to Deuber, compared with lower loan growth in the overleveraged retail segment (-0.4% in Bulgaria and 2% in Romania).
But in contrast to Poland or Russia, bad debt is still rising in southeastern Europe: it is now at around 15% in Bulgaria and Romania. Profitability in the banking sector is still low. In Romania, average return on banks equity has been negative for the past two years, while in Bulgaria it is only around 6%, a figure slightly lower than Bulgarias 10-year government bond yields.