During the course of Greek debt negotiations, debate has been dominated by the questions about the impact of this crisis on the Euro zone. Few discussions have focused on the potential economic and political ramifications the crisis may pose for countries in Southeast Europe (SEE).

With the stakes so high, Greece’s ability to strike a deal with its Euro zone creditors is good news for everyone especially for the countries of SEE. The most recent bailout deal of around 80 billion Euros has generated a good amount of optimism although many details remain hazy . Significant hurdles need to be cleared and the risks have not gone away.

Beyond Greece, the threat of economic instability in SEE is real. The economic situation of Greece’s neighbors remains fragile due to the lingering effects of the European financial crisis. The World Bank notes the region suffered a double dip recession over the last five years with an average regional GDP contraction of 5.9 percent in 2009, and another 1.2 percent in 2012 .

SEE’s heavy dependence on European markets resulted in negative trade and associated financial spillover effects. As it struggles to regain its economic stride, SEE continues to experience sluggish growth rates and poor market and investor confidence .

The current economic turmoil in Greece has only highlighted the region’s vulnerabilities and challenges. The macroeconomic imbalances of the region make them particularly vulnerable to Greek economic contagion. Direct and indirect effects from the Greek crisis concern mainly the banking sector, trade, foreign direct investments, and foreign workers´ remittances .

Over the last two decades, Greek banks established a significant number of subsidiaries in SEE countries. Greek banks represent approximately 20 percent of the financial and banking market of SEE. They play an important role in Bulgaria (20 percent), Macedonia (20 percent), Albania (16 percent), Serbia (14 percent), and Romania (12 percent) .

As the Greek crisis unfolded, SEE Central Bank authorities appear to have put in place measures to insulate the Greek owned banks from a possible contagion by ring-facing the local subsidiaries from their parent institutions.

Indeed, in most of the countries, subsidiaries of Greek banks hold no Greek government securities and seem to have sufficient capital and normal liquidity levels. Strong capital-adequacy ratios have been introduced in SEE to protect depositors, and ensure the stability of the financial system.

However, the question is whether a Greek banking collapse at home would affect customers in the SEE and spread contagion in the form of panic withdrawals. It remains uncertain how a Greek bank bankruptcy and recapitalization would affect Greek banks abroad. Even if not directly impacted by recapitalization, this process would likely force their affiliates in SEE to cut back the lending.

Any panic will predictably slow down lending by other European banks with significant exposure to the Greek sovereign debt. The region is more vulnerable than other areas because the banking system is owned up to 80 percent in some of the countries by foreign banks. If the much squeezed credit market in the region is factored in, the situation further appears even gloomier.

However, there could be some potential good news for the banking sector after the third bail-out deal. According to the most recent agreement with the Euro zone creditors, a new trust fund of 50 billion Euros of Greek assets will be set, with half of it to be used for recapitalization of the banks . Theoretically, this should avert the risk of a crash of the banking sector in Greece and have some positive ramifications for subsidiaries in SEE.

When it comes to trade between SEE and Greece, it has declined over the last years, and Greece is not anymore among the main destinations for the SEE`s exports. However, Greece remains the second biggest importer in most countries of SEE.

The economic recession in Greece has had a negative impact on remittances to SEE countries, mainly for Albania, Bulgaria and Serbia . The return of these economic migrants to their origin countries is another risk that put more stringent pressure to the weak economies in the region.

Formerly, Greece was one of the largest investors in SEE. In 2009, Greece´s outward stock of foreign direct investment (FDI) in the region stood at $ 10.5 billion, making up 27 percent of investments . Greek FDI is now less significant in the region.

However, for Greece itself, SEE remains an important market. In fact, if one is to evaluate Greek FDI in general, the stock of FDI per capita in Greece diminished by almost 35 percent from 2009 to 2013 yet the stock of outward investment saw a slight increase, from $3.555 in 2009 to $4.165 in 2013 .

Last but not least, a worrying negative spillover is the political one. Greece’s current situation was no doubt brought about by lax attention to following formal standards and implementing sound fiscal management standards. It is a lesson learned for the EU.

For the SEE, the Greek crisis will likely impact the prospects and the timing of the EU integration of the aspirant countries and may even call into question.

The green light for EU integration of SEE was promised in the 2003 Thessaloniki Summit . It would be ironic if the Greek crisis results in a longer integration process for aspirant countries in this small region.


(*)The views presented are those of the author and do not necessarily represent views of Department of Defense or its Components.