Southeast Europe, by common consent, is the region most at danger from any Greek exit from the euro. To such an extent that the European Bank for Reconstruction and Development's chief economist in May called for erecting a "ring of defence" around Bulgaria, Romania and Serbia to help them cope.
"There are already measures in place," Erik Berglof told delegates attending the EBRD's annual meet in London. "We don't speak about it much, but... in these times of crisis one has to understand the importance of financial stability."
Greek banks have a huge presence in Albania, Bulgaria, Macedonia, Romania and Serbia, and account for large shares of domestic bank assets in these economies, with the highest being Bulgaria with 24% (and, by some estimates, 20% of the country's bad loans). In its "Global Economic Prospects" report released in June, the World Bank said that despite shedding $8.5bn of their claims between June and December 2011, Greek-owned banks still had $69bn in foreign claims (direct cross-border lending, and foreign and domestic currency lending through its subsidiaries) in the region by the end of 2011 (see table). "In countries such as Bulgaria and Serbia, subsidiaries of some of these banks have relied upon cross-border lending from their parents to support their loan portfolios, with loan/deposit ratios well over 100%," the World Bank said.
Capital Economics picks Bulgarian and Croatian banks as the most dependent in Emerging Europe on short-term credit lines from parent banks in the Eurozone periphery. Its main view is that this financing will be withdrawn, but only gradually. However, it warns that a more sudden withdrawal of funding is a distinct possibility, given their banking sectors' ties to Greece and Italy. "If this scenario does materialise, both economies face a severe domestic credit crunch that could knock some 1.5-2.0% off GDP. In the worst case, both could be forced to turn to the International Monetary Fund for help," the economic consultancy says.
The euro crisis has already taken a heavy toll on countries in the region as trade with the Eurozone, especially the peripheral states, has slumped. Croatia, Romania, Slovenia and Serbia all saw their economies contract in the first quarter; Bulgaria managed to eke out growth of less than 1%. Bulgaria's exports to Greece alone are estimated to be worth some 3.5% of GDP, while exports to Italy are worth another 3.5-4.0% of GDP for both Bulgarian and Croatian economies. "With the recession in the Eurozone periphery only set to deepen, it looks like exports have further to fall... Expect things to get worse from here on," it warned.
Romania, the largest economy in the region, is already looking unstable after succumbing again to its perennial problem of political instability following the fall of the government in April. Fresh parliamentary elections are scheduled for November. Between now and then, the economy is expected to continue contracting, while analysts estimate that a sudden bout of deleveraging by Eurozone parent banks from their Romanian subsidiaries due to a euro break-up could knock as much as 3% off GDP. "The economy is one of the most exposed in Emerging Europe to the growing risk of a Eurozone break-up due to its direct financial and trade linkages with Greece," says Capital Economics.
The business daily Ziarul Financiar put together some scenarios for the effect of a Grexit on Romania. It predicted that depreciation of the local currency, which already hit an historic low in May, by 10-15% against the euro and the doubling of interest rates for lei on the interbank market would be the direct and fast effects on the Romanian market. This would have terrible knock-on effects because around two-thirds of household debt is denominated in foreign currencies, meaning further leu weakness would hit domestic demand by raising debt principal and servicing costs. "I hope Greece is going to remain in the Eurozone," Romanian Prime Minister Victor Ponta said on June 6. "Romania and all the countries in the region have already been affected - I hope they won't be affected even worse in the future."