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South East Europe: Investing In The Future

articles & speeches

SEESOX, St. Anthony’s College, University of Oxford

The eurozone sovereign banking and fully blown financial crisis is unfolding daily in front of our eyes.

1.How is the situation in the eurozone today affecting the SEE countries?

The eurozone sovereign banking and fully blown financial crisis is unfolding daily in front of our eyes. It is like a movie, a thriller, only that this time we know who did it, but we do not know if the culprits will end up in jail and if we will live happily ever after. Three things are almost certain:

  • this crisis will not end up any time soon;
  • I doubt that we will have a “big bang” solution, probably a series of small changes;
  • whatever happens, we will end up in a new world, institutionally, structurally and in terms of potential GDP growth. Regarding growth, it is almost certain that the eurozone will end up in a new recession in Q4 and at least Q1 2012. Downside risks are in the rise. When I was reading the Seminar program I thought it funny that it mentioned a recovery. We do not see any recovery for Croatia either this or next year.

The latest developments will obviously negatively affect the SEE economies. This is a no brainer, but I would like to elaborate a little bit more on possible transmission cannels:

  • the trade channel (exports, including tourism);
  • risk contagion via higher pricing for the region, for example Croatia’s CDS, 250 to 530 BPS;
  • the banking channel (the structure of the banking industry, foreign banks). In 2012 we can expect either no new capital inflows (either capital and/or deposits, especially long-term), or even deleveraging and outflows due to Austria’s regulator LDR of 110%, RBA’s and Erste’s announcements of deleverage (even exit) from some countries. Vienna seems to be dying if not dead, and some countries might experience a credit crunch. Again the banking channel, but via bad news that may create (another) run on banks. When our banks were privatized, reputable foreign owners added credibility to the domestic banking system, now it seems to work the other way around.
  • Uncertainties about the euro in general create negative expectations for domestic savings and investments. We daily receive a lot of questions about what will happen to savings and economies if the euro disappears. Advanced economies have always been looked up to and creating positive expectations. Now, Mervyn King’s yesterday statement to get ready for the break-up of the eurozone is not good news for us. And in the era of globalization and IT, I observe a big difference when compared to the world fifteen years ago (the Asian crisis) – whatever bad news on euro/international developments is reported in specialized press, it finds its way to evening prime-time news.
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