If there’s something Greek and strange in your neighbourhood (bank contagion risk to sovereign credit in emerging Europe, to be precise)…
…Who are you going to call?
In Nomura chart form:
Click to enlarge. It’s a ragbag of IMF credit lines, precautionary and flexible, for the most part. Romania happens to be the only one with stand-by arrangement financing and even then, it’s not a full SBA as yet. Bulgaria, the other enormous Greek bank exposure, and truly festering in terms of its property market, has nothing at all.
Isn’t this a bit imprudent?
‘Even under a disorderly default in Greece, we would not envisage a balance of payments crisis in Emerging Europe,’ say Nomura analysts Peter Attard Montalto and Olgay Buyukkayali, and it’s true that current account deficits in the region aren’t as bad as in the 2008-09 crisis. But clearly there are weak-points here (such as Bulgaria) and it’s hard to tell how general investor pull-back in the region would unfold. Hungary is suddenly popular again for inflows of capital, for instance, but that could just as quickly change.
And there is also the small matter of the IMF.
Let’s imagine Greece defaults and brings its banks down with it, such that they begin repatriating capital from their subsidiaries in the area.
Currencies go south, FX loans turn toxic, and a credit crunch sets in. Governments are pushed to rescue banks and boost FX reserves, hence the IMF is pushed to augment, or begin, programmes in the region. But… a Greek default would seriously damage the Fund’s reputation and willingness (capacity?) to lend into credit risk by this point, surely. We’re talking about another Argentina here.
There are other ideas — interestingly Nomura propose a swap line between the ECB and the Romanian central bank, considering that Greek banks do appear to have been taking cheap funding out of Romania. But it’ll be intriguing to see what the IMF can do here. Notably sovereign CDS in the region remains fairly quiet. Too quiet.
And it’s not like private bailouts would help much either. There’s a great deal of emphasis in that table on extending Vienna Initiative funding from foreign banks to subsidiaries, but since many of those maintaining exposure were Greek banks…
Related links:
Old Greek bank risk in New Europe, again – FT Alphaville
The International Monoline Fund – FT Alphaville