Bulgaria has more to lose than its southeast European neighbors Romania and Serbia in a potential collapse of the Greek economy, Morgan Stanley said in a report.
“Greek banks hold a significant share in Bulgaria, Romania and Serbia, with the highest share of foreign claims being in Bulgaria,” Morgan Stanley Research said in the report on Monday. “While the direct economic impact of a Grexit looks manageable, we think that the banks are by far the most serious potential channel of contagion.”
Greek banks have about 14 percent of their business on average in the southeastern European markets, according to the report. They hold a market share of around 25 percent and their operations are funded with deposits of around 15 billion euros ($16.7 billion), Morgan Stanley said. Greek lenders constitute 33 percent of foreign claims in Bulgaria, 18 percent in Romania and 23 percent in Serbia, it said.
European finance ministers are due to resume talks on Greece on Monday. German Chancellor Angela Merkel is coming under growing pressure from within the ranks of her own party bloc to give up on Greece for the sake of the euro. The euro area has denied debt relief to Greece and insisted the government observe the terms of the existing bailout. The International Monetary Fund has signaled its concern over the deterioration in the country’s finances.
“We see the potential for large deposit outflows as the key transmission mechanism of risk,” Morgan Stanley said. “In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in.”
Bulgaria is also most exposed to Greece as its exports to the neighboring country account for around 7 percent of the total, or 3.8 percent of gross domestic product, Morgan Stanley said. Serbian and Romanian exports account for 1.4 percent and 1.1 percent of the total, respectively, and 0.4 percent and 1.1 percent of economic output, according to the report.
“A potential bank run on Greek banks in the region would have a significant negative impact on local governments’ fiscal deficits and their debt,” Morgan Stanley said. Bulgaria plans to narrow its 2015 budget gap to 3 percent of economic output after 3.7 percent in 2014.
Banks in Romania and Serbia are “less exposed to short-term rollover risks,” while “Bulgaria looks more vulnerable, with 80 percent of the total gross external debt being short term,” according to the report.
“I don’t think a Grexit will have any consequences on the Bulgarian banking system,” Plamen Madjarov, markets manager at United Bulgarian Bank, controlled by the National Bank of Greece, said in an e-mail. “We don’t have any Greek assets and there shouldn’t be any shocks. We should take into account the attitudes of the depositors. We are monitoring the situation, there is no tension for now.”
Bulgaria, the poorest European Union country in terms of per-capita output, spent as much as 4 billion lev ($2.3 billion) to repay deposits after Corporate Commercial Bank AD, the fourth largest lender, failed last year and triggered early elections.
“Greek banks in Bulgaria are registered under the Bulgarian legislation and I don’t see any risk for the Bulgarian banking system,” Ilian Scarlatov, a managing partner at Mane Capital brokerage in Sofia, said by phone.“All Greek banks in Bulgaria are potential takeover targets. If Greece leaves the euro-area, most of the Greek lenders in Bulgaria will probably change ownership.”