Despite the interconnectedness of today’s globalized business world, the current debt crisis in which Greece is mired will have only a marginal impact on the local economy, say analysts. Besides, there are several significant differences between the two economies that should protect Romania from the threat coming from its exposure to Greece.
Greece’s debt crisis has prompted many national and international macroeconomists to ask if the globalized nature of the 21st-century economy means that other Central and Eastern European countries will also be impacted. Regardless of size and geographical area, any country could have exposure to any other economy in the world. But what are specialists saying about Romania? Could it be swept up in the Greek drama?
According to National Bank of Romania (BNR) data, the total foreign direct investments of Greece in Romania were worth EUR 3,154 million at the end of 2008, or 6.5 percent of the total FDI. Practically, the Romanian economic sectors where Greek investors have seen their power lessen will be adversely affected. Dragos Cabat, managing partner at Financial View, thinks the Greek crisis will be a double-edged sword for the local economy.”The local economy might be hurt by the deterioration of foreign investors’ perceptions of EU emerging markets,” says Cabat. But there is a silver lining. In his opinion, Romania has benefited from IMF and EU officials’ munificence in response to the Greece crisis: they simply cannot afford to let it spread to other countries in the region.
Others are similarly hopeful
that Romania will not get sucked
in to the meltdown. Nicolaie-Alexandru Chidesciuc, chief economist at ING Bank Romania, says that it seems, at least for now, that the Greek debt crisis will have only a marginal impact on the local economy. “There are significant differences between Greece and Romania. First, the local economy doesn’t have the weaknesses of the Greek one. The level of public debt (EU standards) is about 20 percent of GDP in Romania, while it is almost 120 percent of PIB in Greece,” says Chidesciuc. He adds that while Romania’s budget deficit has reached a significant level, the local authorities first implemented some measures to remedy the fiscal imbalance more than a year ago, while Greece has only turned its attention to the problem relatively recently.
International bodies have been encouraging of the Balkan country’s efforts in this regard. Caroline Atkinson, director of external relations at the International Monetary Fund, welcomed the substantial fiscal measures announced by the Greek government recently. “The authorities have put together a very strong fiscal package for 2010. The implementation of the fiscal program will be a crucial step forward in a multi-year process,” said Atkinson. She added that the IMF has also urged the authorities to quickly come up with and implement significant reforms to boost productivity and growth, complementing the fiscal consolidation that is now underway. “We stand ready to support the implementation of the authorities’ plans by sharing our technical expertise in these matters,” she said.
According to Chidesciuc of ING, another significant difference between Romania and Greece is the agreement signed with the IMF and the EU, which ensures access to external financing in case of turbulence on international markets. “The existence of this agreement also limits the possibility of such turbulence appearing in Romania’s case, as it is an important guarantee of the regular course of the fiscal consolidation process,” says Chidesciuc. He also emphasizes the agreement to maintain their exposure on the local market to which nine banks active in Romania committed.
Homing in on what parts of the market might be most affected by the Greek quagmire, Cabat says that the Romanian financial sector will suffer because of the potential shortfall of funds to support lending. “Secondly, those sectors which export to Greece will probably see reduced demand. Last, but not least, the labor market will be hit because many Romanians work in Greece and they could be laid off if Greece goes into a significant recession,” warns Cabat.
According to Chidesciuc, the strongest link between Romania and Greece is the banking scene. “Lenders with Greek capital have a combined market share of about 15 percent. But if Greek banks decide to slash their lending, other players will increase their assets, given the current liquidity in the banking system and the medium- and long-term perspectives of the local economy,” predicts the ING chief economist. According to him, the solvability rate of the banking system is still high – about 14 percent, the highest level in the last two years and significantly above the minimum limit of 8 percent.
“The commerce channel is probably less important, considering that exports to Greece make up less than 2 percent of the total. Besides, the dependence on Greek FDI is relatively low, about 7 percent of the total,” adds Chidesciuc. If the economic situation in Greece continues to deteriorate, it will have a detrimental knock-on effect on the sentiment of foreign investors. This could push up Romania’s risk premium
“Greece’s debt crisis affects all eurozone economies through the downward pressure exerted upon the euro. Moreover, it is possible that many EU members will stay stuck in recession, because of the unprosperous economic conditions,” says Cabat. On top of this, financial sources for some EU and emerging countries will become fewer and more expensive, as a result of investors’ reduced appetite for risk. “Many countries from the EU with a dubious budgetary system will be more carefully monitored by EU officials. Unfortunately, it is possible that small countries will be ‘punished’, while Italy for example will be forgiven, based on its influence in the EU zone. In exchange, smaller countries that have never engaged in any budgetary excesses could be also affected,” warns Cabat.