Shortly after Eurozone ministers agreed to grant an emergency $900 million loan to keep Greece’s finances afloat until a real bailout is approved, the European Central Bank also put secret lines of credit in place with two of the beleaguered country’s neighbors: Bulgaria and Romania, according to a report from the Financial Times.
As central bankers in central eastern European countries scrambled to reassure investors and depositors that the Greek crisis wouldn’t impact them, some observers speculated that the spillover effects could be worse than previously anticipated. But it is Greece’s economy, not those of its Balkan neighbors, that the ECB is aiming to save with this latest backdoor move, insiders say.
“Greece’s Piraeus, National Bank of Greece, Eurobank, and Alpha Bank all have substantial assets in central and eastern Europe. If those assets were seized by local regulators, the parent banks would take an immediate capital hit, dealing a potentially terminal blow to Greece’s domestic financial system, which is already hanging by a thread as the country battles to agree a new rescue package with international creditors,” wrote Laura Noonan for the Financial Times.
In a bid to ensure calm amongst local regulators, the bilateral credit lines are meant to assure banks in Bulgaria and Romania that the Greek banks in their countries will be supported until the situation in Greece returns to a relative state of normality.
It remains unclear, however, why the ECB has not publicly announced its decision when similar swap lines have not been kept secret previously.
In late June, when eastern and central European banks were especially concerned about contagion, experts noted that the central banks in Bulgaria and Romania were counting on potential swap lines and existing capital buffers to keep them out of harm’s way.
“I don’t expect a huge and long-lasting contagion from a Grexit in Romania and Bulgaria,” Union Privatfonds representative Dmitri Barinov told Bloomerg Business at the time.
“Their central banks have enough foreign-exchange reserves to protect their currencies and their government debt levels are very low,” he noted, while mentioning that the two poorest members of the European Union are among the five countries with the lowest public-debt burdens in the 28-member union.
Still, in recent weeks both Macedonia and Serbia have placed extra restrictions on the movement of capital between local subsidiaries and their Greek parent banks, and Macedonia’s Central Bank ordered lenders to pull their deposits from Greek banks.
Government bonds in Bulgaria, Macedonia, Romania, and Serbia have suffered during the past few weeks of the crisis, and experts largely agree that neighboring countries are far from immune to the situation south.
“Countries in Eastern Europe are more exposed to Greece than Asia or Latin America because of their extensive trade links and the hit the crisis will have on demand,” Costa Vayenas, the Zurich-based head of emerging markets investment at UBS Wealth Management, told the Wall Street Journal.
“If there is a deeper recession in Greece, this will have a bigger knock-on effect on the Bulgarian economy than on other countries in the region,” he added.
Around 7 percent of Bulgaria’s exports, mostly clothing, metals, and electricity, go to Greece, a higher percentage than the rest of its Balkan neighbors. Greece is also one of the biggest foreign investors in Bulgaria.
Local bank chapters across the Balkans, however, reported that business was continuing as usual over recent weeks.
The ECB has served as an anchor in the region, which in recent years has been rocked by the Eurozone and the Greek financial crisis.
Just last month the European Commission announced that it would approve Bulgaria’s request for a credit line of 3.3 billion levs ($2.30 billion) in support of the country’s banks, which had faced runs by nervous depositors.
Bulgaria's banking system was "well capitalized and has high levels of liquidity compared to its peers in other member states. For precautionary reasons, Bulgaria has taken this measure to further increase the liquidity and safeguard its financial system", an EU executive said in a statement at the time.
At present, the ECB says it is keeping close watch over other, non-EU neighboring countries where Greek banks have operations, including Albanian, Macedonia, and Serbia. Greek banks own more than a fifth of Bulgaria’s banking assets and about 12 per cent of Romania’s. In Serbia, meanwhile, the four Greek-owned banks have a combined market share of 15 percent.
Now, most of Europe is hoping that the troika’s emergency loans will keep Greece afloat and avert any major economic setbacks in neighboring countries.
It is believed that Greek banks could reopen on Monday after having remained shuttered for almost three weeks. Capital controls, however, would remain in place.