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What Does the Tsipras Referendum Bode for Greece's Neighbors?



Much will be written on the likely deleterious effects of Prime Minister Alexis Tsipras's surprise call for a referendum of the Greek rescue package. Former prime minister Georgios Papandreou attempted a similar step in November 2011, leading to the resignation of his government a few days later. Fortunately, the actual step of holding a referendum of the rescue package did not occur then. This time, the Syriza government seems determined to push the referendum through. If so, how will it affect Greece's neighbors? Few analysts are asking this question yet, as the attention is centered on Greece. As former finance minister of Bulgaria, however, it is the neighborhood effect that interests me more.

The first order effect is clear from previous banking crises in the euro area: Left without emergency credit support by the European Central Bank, Greek banks will quickly go bankrupt. The Greek Central Bank will likely direct Greek banks to concentrate all their efforts on the domestic market and dispose of their foreign assets as quickly as possible. This happened in Ireland in 2010, and the unwinding of banking assets abroad took place in a little over a year.

Greek commercial banks have substantial subsidiary or branch presence in Bulgaria (three subsidiaries and one branch), Serbia (four subsidiaries), Albania (three subsidiaries), Cyprus (five subsidiaries and one branch), Romania (four subsidiaries), and Macedonia (two subsidiaries). In Bulgaria, for example, they account for close to a quarter of banking assets and commercial credit. Their share is similarly high in all Balkan countries but Romania. Hence the exit of Greek-owned banks from the market will have significant consequences.

The major consequence is that the market for commercial credit will shrink even further. In the past 10 to 15 years Greek banks have been among the most active in seeking out commercial clients across the Balkan countries. Their withdrawal from commercial lending will be felt, especially as there are few potential buyers with the same level of interest in the region. A few years back, interested buyers would have come from within the ranks of Austrian, Russian, and Turkish banks. Now Austrian banks are themselves retrenching across Eastern Europe. Russian commercial banks are under sanctions from the European Union. And Turkish banks have trouble at home, where the economic cycle has turned sour. In short, none of them are likely investors.

This dearth of investor interest means that the overall access to capital in the region will diminish substantially, and not just temporarily. It is conceivable that local investors may buy up the assets at firesales. Longer term, having more local ownership in the banking sector may even be beneficial. But a few rocky years lie ahead for corporates across the region.

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