Thursday, May 06, 2010

Greece and its neighbours

Greece's woes and the neighbours 

Greased up
May 6th 2010
From The Economist print edition

The region may share in some of Greece’s pain

AVERTING a meltdown in Greece, at least temporarily, is good news for that country’s fragile ex-communist neighbours. Their big worry is Greek-owned banks, which account for as much as a quarter of banking assets in Bulgaria, some 15% in Romania and a tenth in Serbia. These institutions have been facing potential runs by depositors, as worries have grown over Greece’s solvency and thus over the Greek banks.

The financial authorities in some nearby countries had already imposed emergency-notification rules to delay (and if necessary to prevent) local banks from being drained dry by cash-hungry headquarters in Athens. The bail-out from the IMF and the European Union includes €10 billion ($13 billion) in recapitalisation for Greece’s banks, and adds a condition about keeping their foreign subsidiaries alive and lending.

This echoes the efforts made last year to bolster foreign-owned banks’ confidence in central and eastern Europe and stop them from pulling out in panic. In that process, as it happens, Greece was particularly unhelpful. Outside advisers have been pressing the IMF and other lenders to make sure that the authorities in Athens behave differently this time.

Any further tightening of credit in Greece’s region is unlikely to be too severe. Other foreign banks may expand their market share as Greek-owned rivals contract. But Greece is not just a provider of capital, it is also a big export market (taking a tenth of Bulgaria’s exports last year). And Greece employs plenty of migrants, especially from Albania, where remittances make up about a sixth of GDP. A deep recession in Greece will surely dent both growth and confidence in its northern neighbours.

Yet some think that the troubles in Greece may also provide a welcome refutation of the notion that Europe’s big divide is between a feckless ex-communist east and a virtuous old capitalist west; it is, rather, between a prudent north and a profligate south. In July Estonia expects the go-ahead to adopt the euro in 2011. With no net public debt, a deficit of 1.7% of GDP and 1.7% inflation, Estonia meets the Maastricht criteria better than any existing member. But nerves may yet trump logic.

Enthusiasm for enlargement is cooling. Any country with Greek levels of debt and hubris (eg, Hungary under its cocksure new government) will meet a particularly chilly welcome. And the sight of Greece’s agonies may make others, especially larger countries such as Poland, think again about the single currency’s advantages. In a crisis being able to devalue and to control your own monetary policy can prove an advantage.

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