Tuesday, February 16, 2010

Spoiler for this week's Forbes column

I just spent a whole night becoming an expert on the Balkan economies. What started out as simple exercise to measure contagion from the Greek crisis to Bulgaria, Romania and Turkey ended up as the draft for this week's Forbes column.

I know providing an executive summary is not a smart way to get people to read my columns, but basically, my story is this: There wasn't a big contagion from Greece to the immediate region (Balkans) because 1. markets were taking cues from global risk appetite, not regional concerns. 2. markets were looking at the wrong places, i.e. trade, FDI and banking risks, where the real risks are in fiscal. So if fiscal concerns spread to US, UK and the like, then we could see the following: 1. The Balkans get hit through global risk appetite. 2. Fiscal concerns come to the fore, meaning that the new foster child could be Bulgaria.

This won't be finalized until tomorrow, so if you would like to refer me to a report/newspaper article, share your thoughts, make comments, you're more than welcome. I usually get my best columns through reader input, so comments are never required, always appreciated...


Mary Stokes said...

Hi Emre...The potential or Greek contagion is something my colleague and I are working on right now as well.

I agree with you that focusing on contagion via the trade and FDI channel may be "looking at the wrong places."

1) Bulgaria is the Balkan country with the most trade ties to Greece, but the Aegean country still only buys around 10% of Bulgarian exports.
2)Greece is a major source of foreign investment in the Balkans, but still accounts for a relatively small share of total FDI.

I completely agree that the shift in global risk appetite could eventually hit the Balkans (although so far this hasn't really been the case.)

As for your argument that Greek woes will bring fiscal concerns to the forefront in Bulgaria, I'm somewhat skeptical. Yes, Bulgaria has a tough road to hoe in the sense that it is essentially in the midst of a Baltic-like adjustment given its massive external imbalances and currency board. Nevertheless, Bulgaria (like Estonia in the Baltics) has been a paragon of fiscal prudence.

When you look at the CEE countries (with the exception of Hungary) and compare their public debt-to-GDP ratios with those of the PIGS (Portugal, Italy, Greece, Spain), the CEE countries look pretty good fiscally...in the Balkans, public debt-to-GDP is quite low.

Nevertheless, we'll need to keep an eye on things going forward since the debt may start accumulating very quickly. So I'd argue that fiscal concerns in Bulgaria aren't an issue right now, but could become so in the future. I'm frankly more worried about Japan and the US if we're putting public finances under the microscope.

I look forward to reading your piece!

Mary Stokes said...

I also should add that I do think the financial contagion channel poses a potentially big risk to the Balkan economies.

Greek banks hold significant market share in Bulgaria, Romania and Serbia (eg. 30% of total assets in Bulgaria).

Also, these Greek banks hold a fair amount of Greek govt bonds (I still need to look into this more.) Whether or not Greece gets a bailout, the population will undergo a massive economic slump, which will trigger higher loan defaults at home in Greece.

At the same time, the Balkan subsidiaries of these banks are struggling in the face of sharply rising non-performing loans in Bulgaria, Romania and Serbia.

So they're essentially facing a double whammy. Adding to their woes of future asset quality deterioration is the fact that they are heavily reliant on external funding (very high loan-to-deposit ratios), meaning these banks could see funding issues in the short-run.

Overall, I think we're going to see major tightening of lending and Greek banks will be hard pressed to even maintain their exposure in the Balkans.

Emre Deliveli said...

Hi Mary;

Thanks for the great comments. And thanks to you, I now know why I got my editor at Forbes confused with my draft:)!

Actually, I meant to say that Bulgaria will look very strong precisely because it is so strong fiscally. I think I used the word "foster-child" in the wrong context; I should have said something like whiz-kid. What was I thinking?

And that's why I don't see a big financial contagion channel for the big three (Bulgaria. Romania, Turkey): For Turkey, Greek banks (actually one) is a small share of the market. Romania is part of the Vienna initiative and Bulgaria is very strong fiscally, so it is in a position to act if Greek-led banking troubles hit. But I definitely agree that the smaller Balkan countries are under great risk.