Call to block funds heading to Balkans harms national interests

Greece never fails to shoot itself in the foot, even if it means hurting its own national economic interests in the short- and perhaps medium-term. This is exactly what has been happening in the last few weeks with the national rescue plan and the subsidiaries of Greek banks in the greater region – for no particular reason. Who would have thought a few months ago when the country tried to formulate its own national rescue plan worth 28 billion euros, aimed at boosting the liquidity of the economy and supporting the local banking sector, that it would become a thorny issue in the economic relations of the country and some of its neighbors? At the core of the problem are certain statements made by central bank governor George Provopoulos and government officials and subsequent leaks to the press. According to these statements, the central bank has the means to ensure that no funds from the national rescue plan are channeled to the subsidiaries of Greek banks in the Balkans. It is an idea that is popular with the Greek public at a time of worsening economic conditions, but clearly not abroad. The statements have apparently been taken at face value by monetary and government officials in neighboring countries, creating a negative environment for the subsidiaries of Greek banks according to their top brass. Some officials from Southeastern European countries have reportedly expressed their displeasure with their Greek counterparts who are trying to downplay the issue by calling on local banks to support their interests abroad by cutting their cash dividends and/or going ahead with share capital increases. «The problem is that they (in other countries) take seriously what we discuss here merely as a public relations exercise,» says a high-level banker at a large lender who has requested anonymity. «In reality, there is no issue.» The senior bank official as well as his colleagues at other credit institutions acknowledge that their subsidiaries face an unjustified negative environment in the neighboring countries because of the statements. This obviously explains why the Hellenic Bank Association came out recently with an unusual statement, expressing support for these countries. It is worth noting that the country’s four largest lenders, namely National Bank of Greece, EFG Eurobank, Alpha Bank and Piraeus Bank had given out about 53 billion euros in loans to foreign countries with the bulk going to Southeast Europe at end September 2008, accounting for 25 percent of group loans. Greek bankers claim the whole issue has been blown out of proportion for purely domestic reasons. First of all, they quite correctly say, «money is a fungible.» In other words, it does not matter whether the money comes from the national rescue plan, Greek deposits or another source. Given their limited resources, credit institutions make tradeoffs about where to place their funds. In this case, money coming from the 28-billion-euro-package enables banks to place the freed up money elsewhere, i.e. in their subsidiaries abroad. Second, a good deal of the Greek rescue plan, up to 15 billion euros from the 28 billion euros, will go toward refinancing maturing bank bonds. The funds raised from the latter have in the past financed loans in Greece and abroad. So, part of the package will refinance loans in neighboring countries. Third, demand for loans in neighboring countries has fallen substantially in the last few months, according to bankers, which means there is no additional pressure on the subsidiaries of local banks to transfer more liquidity abroad to make up for the fact that deposits in Southeastern European countries lag behind loans. So, in reality, the statements made by the Greek officials, which present Greece as a country favoring financial protectionism, have no substance, since either a good deal of funds from the rescue plan cannot be prevented from flowing into neighboring countries and/or there is no real need for this to happen because the demand for loans there has fallen off. However, these unfortunate statements appear to have the potential to create a lot of problems for local banks operating in these countries and in general for Greek national economic interests in the region and this will become more evident in the next few years. So, it is never too late for the Greek officials to change course and follow the example of their Austrian counterparts, by signaling their full support for economic assistance to EU and non-EU members in Southeastern Europe from all available sources, namely IMF, EU etc.