Fearing Spillover, ECB Moves To Shield Neighboring Banks From Greek Meltdown

On Monday, in “Beggar Thy Neighbor? Greece’s Battered Banks Beget Balkan Jitters,” we took an in depth look at the potential for the Greek banking crisis to infect Bulgaria, Romania, and Serbia, where Greek banks control a substantial percentage of total banking assets. 

We noted that yields on the country’s bonds had spiked in the wake of capital controls in Greece and the ensuing ATM run, a reflection of souring investor sentiment despite assurances from local banking officials that there was no risk of similar measures being implemented outside of Greece.  

“Any action by the Greek government and the central bank to impose measures in the Greek financial system have no legal force in Bulgaria and can in no way affect the smooth functioning and stability of the Bulgarian banking system,” Bulgaria’s central bank said, in a statement. 

Still, as Morgan Stanley pointed out nearly two months ago, “the risk is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits. Although well capitalised and liquid, Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in. Local central banks and governments would most probably provide additional liquidity, but if panic behaviour develops it would mean that certain banks would either have to find a buyer or be nationalised. In this case, the national deposit guarantee schemes will have to repay guaranteed deposits and, in case of insufficient funds, the government will have to provide them.”

Now, with Greece’s future in the EMU hanging in the balance, Bloomberg says the ECB has stepped up its efforts to shield Bulgaria from any fallout. Here’s more: