ANALYSIS – Global Banking Woes Won't Ruin SEE Banking System, but Economy Will Suffer

Southeastern European banks are not directly exposed to U.S. subprime crisis as they have not developed risky financial instruments, analysts and industry officials say. Banks in the region, some of them underdeveloped, are conservative and their interest income is the main source of their incomes.

In the last few days bank officials have said that the banking systems in the region are stable and banks operate firmly. However, the crisis will inevitably have an indirect impact on bank operations, they concede. Banks in the region face no significant problems with liquidity at present but it may become a point to worry about in the future as loans on the interbank market will be less affordable and more expensive.

The crisis will have a direct and indirect impact on the biggest country in the region, Romania, said Ionut Dumitru, Chief Economist at the Romanian unit of Raiffeisen Bank.

“The direct impact is limited due to the fact that local banks have no exposure on the U.S. subprime market,” Dumitru told SeeNews.

“The main impact would be an indirect one - through an increase in the cost of external financing,” Dumitru said.

“The increasing risk aversion in international markets, the lack of confidence between counterparties in international financial markets and particularly the increasing risk perception for Romania means a higher cost for external borrowings,” he added.

This will translate into a higher cost of lending and tightening lending conditions, leading to a slowdown in credit growth and eventually a slowdown in economic growth, Dumitru said.

Nicolaie Hoanta, director general of Romania’s Banca Carpatica, also said that higher financial costs will lead to higher lending rates. “Undoubtedly, the global financial turmoil will not go round Romania, having in mind that the crisis has “comfortably” settled down,” Hoanta said.

“As far as Banca Carpatica is concerned, the influences have been and will be related to the development of the stock prices and the development of the financing costs, which will imply higher interest rates on credits,” he added.

Stocks on the Bucharest Stock Exchange, along with the other southeastern European bourses, suffered severe losses in the last few days, shadowing global market woes.

Hoanta said that Romania does not need a bailout plan for its banks at present, but the government and the central bank should have alternative plans and solutions for unforeseen developments. He added that “the specifics and the position of the Romanian economy in the world economy makes us believe that the impact will not be a major one”.

Romania joined the European Union (EU) together with its southern neighbour Bulgaria in 2007.

The global financial turmoil will not miss Bulgaria, either, said Maya Georgieva, an executive director of Bulgaria’s First Investment Bank.

“The financial crisis will impact Bulgaria’s economic growth. The gross domestic product (GDP) growth forecast for next year is around 6.0%, which is not an unachievable target, but it is not high growth, either,” Georgieva said.

Slower and limited lending is among the most important impacts of the crisis on the Bulgarian economy. Higher bank costs of borrowing will make banks raise their interest rates and lending requirements, Georgieva said.

“The moment has come when the presence of a sound and stable bank with very high liquidity is more important than its market share and profits,” she added.

The central bank of the other EU member in the region, Slovenia, said on Monday the country’s banking system was operating smoothly and did not feel the consequences of the events evoked on the global and European markets. Slovenia is the only southeatsern European country so far that has joined the eurozone. It entered the wealthy club last year.

“The Slovenian banking system is really stable at the moment,” Andraz Vrh, an assets manager at the local Ilirika brokerage, told SeeNews. However, he added that credits will drop and banks will report weaker financial results this year.

“There will be also an impact on the companies’ performance. The development will be halted,” Vrh said. He expects companies to cut their investments as their financial costs will raise.

“Expansion cannot last forever. There is a positive cycle and now we are in a negative cycle,” Vrh said. Weaker financial results are not something dramatic as long as the stability of the financial system is preserved, he added.

Analysts have said the Slovenian banking system is very underdeveloped and that’s why it has no difficulties with liquidity at the moment. The conservative vein in which local banks operate will help them weather the crisis, they say.

The banking system of Serbia will not be impacted directly, but will suffer consequences from the crisis, the head of Belgrade-based Confidence brokerage, Igor Pacanoski, told SeeNews.

“All deposits are really safe and they [banks] haven't put any money in risky operations,” Pacanoski said, but added that sooner or later the indirect impact will come. “Next year we can expect a lower inflow of foreign investments,” he added.

Macedonian analysts have said the current crisis in Europe will have no immediate effect on the country's banks, as there is no information any of them to have been directly connected with major European banks in trouble.

The country, however, will feel the ripples of the global crisis, like a decline in exports and a massive slowdown in economic activity. Analysts have also said that Macedonian export and import-oriented companies would have difficulties issuing letters of credits, raising deposits and obtaining loans in foreign exchange.

Southeatsern European countries registered robust economic growth last year.

Serbia's economy grew by a real 7.1% and Slovenia had a GDP growth of 6.8%. Romania and Bulgaria posted GDP growth of 6.0% and 6.2%, respectively. Macedonia’s economy grew by 5.1% in 2007.

(SeeNews reporters Sabina Kotova and Vladimir Petrov contributed to this analysis.)