The political and central bank authorities in Tirana should not underestimate the twin Greek economic and sovereign debt crises. Their potential implications medium-term are considerable. Some spill over effects are already manifesting themselves in Albania. In a word, despite a remarkable economic success story during the past years, Albanian policy makers would make a grave mistake by judging that they are immune to developments in Greece.
With a mixture of concern and anticipation neighboring countries in South Eastern Europe are trying to determine how they will be affected by the cross border consequences of this multi-year crisis in Athens. In light of Greece’s track record of foreign direct investment, its foreign policy focus on the region and growing trade volumes between the neighboring countries Serbia, Albania, FYR Macedonia, Romania, Bulgaria and Turkey cannot remain indifferent to the magnitude of the crisis next door. Nor can they cast a blind eye to the policy making solutions being advocated in Brussels, Berlin, Paris and Washington and having to be implemented in Athens.
What could be the short to medium-term repercussions of the Greek economic and sovereign debt crises for its neighbors? Is the contagion risk limited or imminent? Some spillover effects have already started to manifest themselves. As Greek 10- year bonds fall and yields continue to remain above ten percent, sovereign debt issuance and the risk premium investors demand to hold securities issued by Albania, Romania, Serbia, Bulgaria and Turkey have been adversely affected.
Albania made a successful Eurobond debut on international capital markets in November 2010. Albania auctioned its first 300m Eurobond with a five-year maturity at a maximum interest rate of 7.5 %. In 2009 the finance ministry had to cancel its maiden Eurobond placement because prices and interest rates in international bond markets were deemed too high. Instead the government took out a €193 million syndicated loan from 20 commercial banks that was managed by Deutsche Bank and Greece’s Alpha Bank.
But the risk perception of the region is changing as a consequence of the crisis in neighboring Greece. Increasing risk aversion will make it more difficult to auction medium-term sovereign debt priced at affordable levels for Greece’s neighbors, including Albania. All the more important will therefore be the focus on the region’s central banks and finance ministries. Their level of domestic and cross border cooperation, the capacity to pool resources and stay the course, i.e. deliver policy consistency despite challenging conditions will be key to mitigate any adverse consequences.
Moreover, the ripple effects of the Greek crisis are being felt in three other key areas, namely
(i) The impact on foreign trade volumes. Greece accounts for 9 percent of total exports in Albania. Declining trade volumes will affect the pace of foreign capital inflows from Greece to Albania. In this area the close financial and trade links between both countries have the most immediate adverse consequences;
(ii) The stagnating level of remittances being sent back home from Greece by labor migrants. This is partly a reflection of many Albanian laborers working in the Greek construction industry, which has seen dramatic levels of redundancies. Moreover, anecdotal evidence is starting to suggest that we are witnessing the first signs of reverse labor migration, either back to Albania or to other countries in the vicinity, e.g. Turkey, Bulgaria and Bosnia;
(iii) The cost of lending by the local subsidiaries of Greek parent banks operating in the region is increasing. Feeling the heat through financial channels is affecting the credit supply of Greek banks to private households and corporates in Albania. It is in this area that we can observe what economists call a ‘negative feedback loop’, i.e. where the dire conditions of the Greek sovereign immediately affects the domestic banking sector, e.g. through rising capital flight, and by extension has consequences on the lending resources being made available to neighboring subsidiaries.
As the 2010 reporting season for Greek commercial banks illustrated, they are being confronted with mounting problems concerning non-performing loans in Greece, which exceeded 10 percent overall and in certain loan categories, e.g. household and corporate reached close to 15 percent. In reaction to this dramatic development Greek parent banks have had to increase their levels of provisioning, which reflect declining asset quality, e.g. in NPLs and Greek government debt that banks hold. The impact on Greek banks’ balance sheets and bottom line, namely profitability for 2010/11 has been severe.
But higher levels of provisioning and increasing capital buffers in the home markets also affects Greek banks’ operational capacity in their main external markets, i.e. next door in Albania, Serbia, Romania, Bulgaria, Turkey and Cyprus. More specifically, such risk aversion strategies, necessary as they are, adversely influence available capital resources for banks’ lending activities in the neighboring markets. A return to annual lending growth rates reaching 50 percent and more, as seen across the region between 2004 - 2008 will not be repeated by Greek commercial banks. Furthermore, stagnating or declining credit supply will impact on rising borrowing costs and tightened collateral requirements for existing loan demand in Albania.
Still, is there some light at the end of the tunnel? Despite the challenges they are facing in their domestic and external markets, Greek banks have participated in the ‘Vienna initiative’ of 2009. They are committed to maintaining their exposure to these countries, even if this takes place with considerable financial assistance through multilateral financial institutions such as the EBRD. During the past two years the London-based multilateral lender has provided critical capital resources to Greek subsidiaries in the region for onward lending to enterprises in Albania, Bulgaria, Romania and Serbia. The total volumes exceed €650 million euros.
Finally, it is noteworthy that Greek banks have not withdrawn from any of their neighboring markets during the past year-and-a-half. While Eurobank has started a process of divestment from a subsidiary in Poland and National Bank of Greece (NBG) is selling a 25 percent stake in its Turkish subsidiary Finansbank, no Greek bank to date has closed shop in any country of southeast Europe! Rather, they are revisiting the priorities of their business plans in neighboring countries, readjusting their lending activities, increasing lending scrutiny and collateral requirements.
Under these difficult conditions, the economic crisis in Greece risks affecting the recovery potential of its neighbors. Over the past decade foreign direct investment from Greece, rising trade volumes with each other and labor migration to Greece all contributed to assist the economic transition of its neighbors. This positive impact may now put on hold for some time to come.
The important question for Albania and other neighbors of Greece is who can be interested in filling the void left by Athens. As recent evidence suggests on the political, investment and diplomatic fronts, the most obvious replacement country is Turkey. Its growing political assertiveness in the region and willingness to use its formidable economic performance and reform achievements of the past decade is starting to visibly change the political economy landscape of southeast Europe.
However, possibly the most important issue on the minds of policy makers and central bank authorities in neighboring countries are the potential consequences for the most crucial political project in the region, i.e. European integration. There is a growing and legitimate concern across capital cities from Tirana over Skopje to Belgrade, Podgorica and Pristina that in light of the Greek crisis the EU accession perspectives for countries in South East Europe could be adversely affected. Put otherwise, following Croatia’s expected accession in 2013 the EU could become rather cautious about further enlargement and more rigorous regarding the economic conditionalities of membership. In short, many voters and policy makers across the continent are keen at avoiding another déjà vu of a Greek tragedy!
It is in this area of foreign policy making where Greek leadership will be most crucial in the coming months. Sending out clear signals of engagement with the region, sustaining these with practical efforts of support for its neighbors can underscore this crucial message. Despite the twin crises and the challenges they present, Greece will not become inward looking, nor forget its neighbors! The government of Prime Minister George Papandreou has always insisted that its ‘Agenda 2014’ - when Greece will again hold the rotating EU presidency - is as valid today for its neighbors as it will be in three years’ time.
Albania is not Greece and vice versa. Both countries face formidable challenges in the years ahead. As neighbors they are interested in trade, foreign direct investment and good cross-border relations. To what degree the sovereign debt crisis in the euro zone will reinforce EU enlargement fatigue remains to be seen. The initial signs are not encouraging.
But it would be a political mistake to slow down the EU integration process because of the Greek, and by extension the Irish and Portuguese crises in the euro zone. However, this conclusion applies to both parties to the bargain. Neither should Albania slow down its reform efforts or instrumentalize the Greek challenges for cheap political gains. Nor should the Commission in Brussels make neighboring countries pay for the political and economic consequences of a crisis for which they are not responsible by putting Albania, Serbia, FYR Macedonia, Bosnia and Kosovo in an indefinite holding pattern on their journey towards the European Union.
*Jens Bastian worked as a Visiting Fellow for the political economy of Southeast Europe at St Antony’s College, Oxford, U.K during the academic year 2010-2011. He is also Senior Economic Research Fellow at the Athens-based think tank ELIAMEP.
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