Crisis in Greece: the credit impact on south-eastern Europe

The turmoil in Greece is having an impact on financial markets throughout the eurozone, but this impact may be felt greater in its five neighbours where Greek banks have a particularly large presence: Albania, Bulgaria, Macedonia, Romania and Serbia.

With funding from Western banks declining in the south-eastern Europe, a retrenchment of Greek lenders could further curtail local lending. According to the Vienna Initiative committee report released in June, the decline in Western banks’ funding towards central, eastern, and south-eastern Europe accelerated in the fourth quarter of 2014, while the domestic credit growth in these regions remained lacklustre. The trend may be reversing, the report says, but any such recovery would be affected by further withdrawal of foreign lenders.

Greek banks are a prominent presence in the Balkan region. In a June report, rating agency Standard & Poor’s (S&P) estimated that the market share of Greek subsidiaries in Bulgaria, Macedonia, Albania, Romania and Serbia ranges from about 15% of total financial assets in Romania and Serbia to more than 20% in Bulgaria and Macedonia.

Greek lenders also provide substantial amount of credit to these local economies. Chart one shows lending by Greek subsidiaries in the five countries as a percentage of total lending by local banks.

At 26.5%, Bulgaria is the most reliant on funding by Greek subsidiaries. In Macedonia and Albania, credit provided by Greek-owned banks is above 21% and in Serbia loans given out by subsidiaries are equivalent to 18.05% of total banking loans. Greeks are least represented in Romania, where they are responsible for 11.68% of banking loans.

In these countries, lending is carried out by subsidiaries of the ‘big four’ Greek banks: National Bank of Greece, Alpha Bank, Piraeus Bank and Eurobank Ergasias. In its June report, S&P points out that some of these subsidiaries have loan-to-deposit (LTD) ratios of greater than 100%, indicating a reliance on non-deposit sources of financing, including parent bank loans. S&P believes that local central banks would temporarily bridge funding gaps should financing from the parents dry up, but if that happens total lending would probably have to be reduced to more sustainable levels in the long term.

Chart two shows aggregate LTD ratios for Greek subsidiaries by country. At 120.9%, the ratio is highest in Romania, which, although it is the least dependent of the five focus countries on Greek lenders, still saw a notable decline in foreign funding in 2014 according to the Vienna Initiative report.

In Serbia and Bulgaria, the ratios are 119.95% and 108.13%, respectively. In Serbia this is partly due to two of the smaller Greek subsidiaries, Piraeus and Alpha Bank, having LTD ratios of more than 166% each. In Bulgaria the funding gap is narrower, but could still present potential problems as Greek operations account for more than one-quarter of total lending. However, there is a chance that any potential slack in lending growth would be addressed by other foreign lenders – Bulgaria is the only of the five countries where foreign lending grew throughout 2014.

On the other hand, Greek banks in Macedonia and Albania are much better funded, as the aggregate ratios for local Greek operations are 87.57% and 75.02%, respectively.

TheBanker.com