Healthier euro periphery

Read our article in the Cayman Financial Review Magazine, eversion 

In mid-2010 the Greece debt crisis exposed deficiencies of the EU political system and cast a shadow on its Balkan neighbours. The cost of insuring Bulgarian, Romania and Hungarian debt against default rose due to “concerns about possible contagion of problems in the eurozone area”, as explained by Morgan Stanley FX strategist at the time.

Another reason to worry was issues of fiscal discipline in Bulgaria and the ability of Croatia, Hungary, Romania and Serbia to sustain austerity required by respective IMF programmes. 

As of today, however, the market distinguishes neighbours from Greece: for the last three months her CDS have been trading above 1,500 bps (hitting at times the mark of 2,000) while spreads on Romania and Bulgaria have remained below 250 bps.

These lower spreads reflect sounder banks, more prudent fiscal policies, and more competitive and rapidly growing economies, which continue to offer attractive investment opportunities.

Greek banks have a substantial presence in the Balkans. In Bulgaria and Macedonia their share of banking sector assets is estimated at 28 per cent, 22 per cent in Romania, about 20 per cent in Albania and 16 per cent in Serbia. Concerns that capital inflows into the emerging Balkan economies, much of it through foreign owned banks, would be reversed as a result of the global financial crisis did not materialise. The governor of the Bulgaria central pointed out in June that Greek banks remain “a pillar for the stability of the Bulgarian bank system”.

This statement is supported by the bank reports for 2010 and the first half 2011: these institutions are well-capitalised, with good liquidity, they are profitable and since 2008 no export of profits has been detected.

This assessment may be applied to all Balkan countries and not only to Greek but to Italian banks. Typically, they are subsidiaries with their own capital, financing businesses in the countries in which they are located; while the countries themselves provide more promising profit opportunities than in Greece or elsewhere in the eurozone.

 

  

Inward
FDI stock 
 

Greek
FDI 
 

  

USD
mn  

 %
of GDP  

 %
of Greek orgin  

USD
mn  

 %
of GDP   

Rank 

Albania  

33,625  

33.5 

25.0 

906 

8.4 

Bulgaria 

42,525 

107.5 

8.3 

3,530 

8.9 

Macedonia 

3,739 

48.8 

15.0 

561 

7.3 

Romania 

72,608 

42.9 

6.5 

4,720 

2.8 

Serbia 19,880 

45.8 

15.0 

2,862 

6.9 

  

Total 

141,577 

43.8 

8.9 

12.578 

3.9 

 

Moreover, these countries are not creditors of Greece, Italy or Ireland, or any other indebted EU country. In fact they are net recipients of external funds. Despite troubles at home, Greek and Italian banks (in some countries their combined share of the domestic banking sector is above 40 per cent) retained or increased their activities abroad.

One stable form is FDIs. Before the global crisis Greece was a prime investor in all Balkan countries. In terms of FDI’s stock, however, it no where exceeds 9 per cent of GDP, including banks themselves as in Bulgaria. And Greek investment often increased in 2010 and 2011. Bank deposits of Greek non-residents in neighbouring countries also grew slowly but steadily because the situation was perceived more stable than at home.

Capital adequacy ratios of Bulgaria (17.7 per cent) and Romania (12.2 per cent) banking sectors are much higher than for EU average – 7.5 per cent. Very often banks in the Balkan countries have better ratios than mother institutions in old Europe.

Profitability prospects for the banks and business are also rather stable, especially if the latter operate internationally. Price levels in the Balkans are on average 30-35 per cent of the EU average, unit labour costs are about the same.

While Bulgaria and Romania are members of the EU and Croatia is expected to become a member on 1 July, 2013, Turkey is in a customs union with the EU since 1995 and all other countries enjoy unilateral EU trade liberalisation (expect for agriculture). Balkan periphery also enjoys business opportunities with Eastern neighbours: Turkey, Russia and Ukraine seem to grow much faster than the EU.

After 2009’s average 5 per cent decline of GDP (in Albania the growth slowed down to 3 per cent in 2009 and 2010), growth resumed last year and in 2011 is likely to be about 3 per cent of GDP. Similarly, fiscal balance has been restored in Bulgaria and Macedonia.

In virtually all countries government debt to GDP ratios remains at tolerable levels. In 2010 in Albania it was 59.3 per cent, in Croatia 55 per cent, Serbia 41.7 per cent, Bosnia and Herzegovina 39 per cent, Montenegro 38 per cent, Macedonia 34.1 per cent, Romania 30.8 per cent and Bulgaria 16.2 per cent.

Most of the Balkan countries offer attractive tax regimes. The corporate and individual income tax is 10 per cent in Albania, Bosnia and Herzegovina (in some regions the top personal income tax rate is 8 per cent), Bulgaria and Macedonia, in Montenegro 9 per cent, and in Romania 16 per cent.

Of course, the aphorism: “when Germany sneezes, we go to hospital”, is common for all the Balkan nations. Any repeated recession in the eurozone or the EU will impose a challenge on the Balkan periphery but based on recent experience they would handle it.

Endnotes:

  1. See: Reuters, Greek bank units in Bulgaria are stable and no profit outflow has been reported, at: http://uk.reuters.com/article/2011/07/15/bulgaria-banks-idUKLDE76E0KO20110715.
National-BankSm