Qafqaz University

Financial Crisis in Greece and its impact on Western Balkan Countries

Student:

Bunyamin Mustafa

Student number: 130214010

Lecturer: Peyman Almasov

Baku 2016

Abstract
Financial crisis and economic downturn still breed distress for Western Balkan
countries and Europe as a group. It is observed that when the economies of these
countries get out of worldwide financial depression, another disaster scarce the zone.
Certainly, a significant amount of the financial sector of the corresponding countries is
mostly related to Greek resources and funds, and the financial harmony among them is
comparatively excessive. Hence, the main objective of this paper is to examine the effect
of the financial crisis in Greece to the Western Balkans countries. To show this effect,
paper is used macroeconomic indicators and examines relationship for the sample
countries. The paper is concluded by discussing solutions on the influence of the
spreading effect on the some policy makers. It also ensures an interesting methodology to
an existing dispute, having engaged attention as regards the effect on nearby countries.
How the debt crisis problem is controlled by particular institutions and the European
Union and which tactics and policies are monitored for crisis reduction are analyzed too.

Key words: Financial crisis, Western Balkan, Greece, policies, European Union,
macroeconomic indicators

Table of Content
Abstract
2
List of abbreviations.... 4
Introduction. 5
Research question... 6
Methodology....... 6
.
Structure. 6
Part 1 7
Economic and Financial Development in the Western Balkan
Countries. 7
Real GDP Growth
Unemployment rate ..
Account Balance .....
Budget Deficit ..............................................
Debt Crisis in Greece and Strategies for Reduction Crisis..

7
8
9
9
9

Conclusion .......... 10
Tables and Charts 11
Bibliography ..... 13

List of abbreviations:
FYROM

Former Yugoslav Republic of Macedonia

GDP

Gross Domestic Product

IMF

International Monetary Fund

CCEQ

Candidate Countries Economic Quarterly

BIH

Bosnia and Herzegovina

WEO

World Economic Outlook

EBRD

European Bank for Reconstruction and Development

BIS

Bank for International Settlements

We are going to destroy the basis upon which they (EU) have
built for decade after decade a system, a network that viciously
exploits the energy and the economic power from everybody else in
society.
Yanis Varoufakis, ex Minister of Finance of Greece

INTRODUCTION
After a period of perpetual economic progress and growth, the financial chaos that blows
in the advanced economies affected the economies of developing countries, including the
Western Balkans1. In 2009 all Western Balkan countries experienced recession, excluding
Albania and Kosovo that still had positive economic growth (see Fig. 1). When the economies of
these countries began to recover from the worldwide economic and financial crisis, a new crisis
exposed in the region, regardless of the reality that the causes and conditions were different2. The
debt crisis which firstly began Greece in 2010 will have a bit time break on the Western Balkan
countries, so these countries are sensitive to the effects of the monetary and fiscal confusion of
Greece and the euro zone. This is primarily because of advanced and higher trade and financial
combination between them, that is the share of banks which belongs to external capital,
especially Greek, in the overall assets of the regions banking system3. As a result, it is inevitable
that the economic improvement of the whole region will decelerate in the forthcoming years.
The predictions about world economic growth for 2016 are estimated at about 3.4 %4, but
still the euro zone is in risk of facing debt crisis. A possible risk comes from the statement that
other countries of the euro zone are also in threat of default of debt excluding Greece, because
warning lights are blinking again in Italy and Spain, both countries that are taken into account
1 The following countries are included in Western Balkan: Albania, Bosnia and
Herzegovina,Croatia, Kosovo, FYROM, Montenegro and Serbia.

2 Daniel Gros and Cinzia Alcidi, Adjustment Difficulties and Debt Overhangs in the Eurozone
Periphery, Center forEuropean Policy Studies, Working Document No. 347, May 2011.

3 Ibid
4 IMF World Economic Outlook (WEO) (2016) forecast of global economic growth for
year 2016.
5

being more disposed to next stages of debt problems5. This may cause supplementary economic
difficulties to the Western Balkan countries, particularly to Albania, which has a comparatively
high economic interaction with Italy, as the transfer of funds by emigrants in Italy ensure a
source of revenue for a great number of population6.
This paper seeks to discuss the question of To what extent financial crisis in Greece had
impacted on main macroeconomic relation and indicators of Western Balkan Countries?

Methodology
The methodology of the paper is based on quantitative analyses of financial crisis in
Greece and its impact on Western Balkan Countries. Impact of the Greek crisis and euro zone all
together is likely to differ considerably among Western Balkan countries, depending on the
domestic economic condition and on their sectors construction7. These difficulties that arise
from result of the debt crisis hint at the need for prompt response, inventively and definitely
through macroeconomic policies. Thus, this paper analyses the impact of the current Greek crisis
on the countries of the Western Balkans. To analyses this effect, outlining macroeconomic data
for the sample countries is measured in this research paper. The paper is concluded by discussing
solutions on the impact of this effect on the part of policy makers. The paper ensures an
interesting methodology to a current concern, having involved little attention in terms of the
spread effect on nearby countries.

Structure
The paper is designed in five sections. The first section illuminates some preliminary
facts that illustrate the Western Balkan economies. The second section expresses the economic
improvement and growth of the Western Balkan countries before and during the crisis by giving
and analyzing figures and data on key macroeconomic indicators, such as GDP growth,
unemployment rate, and current account balance and budget deficit. The third section discourses
in brief the policies that are implemented by corresponding authorities, specifically the European
5 The New York Times, April 8 2015.
http://topics.nytimes.com/top/reference/timestopics/subjects.

6 Ibid
7 Kaminsky G, Lizondo S, Reinhart C (1998) Leading indicators for currency crisis.
Staff Papers-Int Monetary Fund 45(1):148
6

Union and the International Monetary Fund (IMF), for the mitigation of the crisis. The fourth
section illustrates the empirical findings that arise from our analyses and research while in the
last section the conclusions of paper are given with answering main objective question above and
recommendation for future policies.

Part 1
Economic and Financial Development in the Western Balkan Countries

Real GDP in Western Balkan Countries

The Western Balkan countries achieved a strong economic progress before the financial
crisis in 2008. The growth rate reached 6.5 % in 20078, but toward the end of 2008 the global
financial crisis influenced the corresponding economies. As respect to the Albanian economy, the
crisis was passed on through numerous ways causing a strong slowing down of the economic
growth from 8 % to 3.3 % in 2009, regardless of the event that Albania is rare economy in
Europe that continued with a still positive real GDP growth during the crisis9. The Republic of
Kosovo was experienced with a affirmative GDP growth too, in terms of crisis, but there was a
drop by 4 % in 2009 compared to the preceding year. The other countries were severely
influenced by the worldwide crisis, especially Croatia, Montenegro and Serbia. As considered to
Bosnia & Herzegovina and FYROM the impacts of the crisis on real GDP growth were calm and
temperate10.
The debt crisis of the European region, mainly related to the Greek crisis, slowly began to
show its existence toward the end of 2011, and as Fig. 1 point out that, real GDP growing started
to decelerate, nearly in the all-region. Annual growth of Gross Domestic Product decrease during
2011 is visible for countries. Based on sector configuration and economic and financial
dependency, there was a general view that in 2012 there would be inferior influences and time
8 The data is taken from by EBRD. The average is calculated as a simple average.
9 Ibid
10 Ritsa Panagiotoua. The Greek crisis as a crisis of EU enlargement: how will the
Western Balkans be affected?.Pages 91-92. Publised- 05 April, 2013
7

proved this when we look at Fig.1 again. Estimates on growing had been studied nearly in all
Balkan countries. Countries whose development or evolution is dependent on exports will suffer
more as in 2009 when the global financial crisis influenced the economies of these countries11.
When the real GDP shows minor signs of the euro zone crisis, the financial sector, capital
flows and lending indicators show worrying proportions12. The real credit has been slow down,
predominantly in Croatia and FYROM.
The financial sector in the Western Balkan countries is mainly controlled by the banking
system, and it has powerful and effective role in balancing the financial system in total13. Differ
from the worldwide economic crisis where the real sector was typically affected and the financial
system stayed constant, now the roles are opposite as a result of the high level of exposure of
these countries to the Greek financial system14. The banking system of the Western Balkan
countries is extremely incorporated with the euro zone banks, thus, these countries are impressed
by economic and financial fluctuations in the Greece and euro zone15. The ownership of foreign
banks in 2008-2012 in Albania, Bosnia and Herzegovina, Croatia and FYROM reached more
than 90 % (see Table 1).
Backe and Gardo state that an increase in foreign investors risk unwillingness to the
region would cause higher risk proceeds, which would increase financing costs or might even
make barriers to acquire funding16. This would result in a deduction or sudden break of capital
entries, which would mainly affect negatively nonfinancial organizations and banks in countries
with tough support on foreign funding. Thus, the consequences of the current economic and
financial crisis will be felt in the long term17.
11 Greek Crisis Undermined Balkan EU Accession Hopes/ 14 July 2014/
http://www.balkaninsight.com/en/article/greek-crisis-undermined-neighbors-eu-bids
12 EBRD (2015) Transition report 2015. Crisis in transition: the peoples perspective.
European Bankfor Reconstruction and Development, London

13 Ibid
14 Is Greece Heading for Default?, Oxford Economics, January 29, 2012.
15 Ibid.
16 Spillovers of the Greek crisis to Southeastern Europe: manageable or a cause for
concern? http://www.oenb.at/de/img/feei_2015_q1_studies2_tcm14-245872.pdf
17 Ibid
8

Unemployment in Western Balkan countries

The unemployment information shows that the Western Balkans had critical
unemployment level even before the crisis18. Unemployment rate of all countries that situate in
this region is more than the EU average of 8.9 %. Respect to the impression of crisis, it is
noticeable that some differences between countries in the region. One can say that Albania and
FYROM did not seem to practice hard consequences, mainly FYROM experienced affirmative
effects through 20082010 (see Fig. 2). Because increasing the unemployment rate by average
1.5 %, Bosnia and Herzegovina and Montenegro showed negative effects in 2009 and 201019.
The labor market was generally influenced in Croatia and Serbia.

Account Balance and Budget Deficit of Western Balkan Countries

The account deficit differs among countries (see Fig. 3)20. According to that graph, it was
wide in some economies, in the first quarter of 2011; for example in FYRM and Bosnia and
Herzegovina it was extended about 1.35 %, however in the other economies of the region there
were not any significant changes compared to the preceding year.
The declining of the budget deficit in 2009 expresses the impacts of worldwide economic
and financial crisis on the Western Balkan economies. For example, it showed 6.8 % in Albania;
8.0 % in Kosovo; 4.3 % in Serbia and 4.1 % in Croatia. Data indicate (see Fig. 4) that in the
second quarter of 2010 the budget deficit expanded in Croatia21.
Economic connection between economy of the Western Balkan countries and Greek
economy are summarized in Table 2 data22. Exports are considered as conduction and
transportation channel, therefore, the data indicates that Greece is a main export marketplace for
FYROM and Montenegro and to a little some extent for Albania.
18 Look Figure 2. Data was taken from World Bank, Unemployment rates
19 Christian Lowe and Peter Graff, Greek crisis hurts poorest in its Balkan neighbors,
July 25, 2013
20 Look Figure 3. Data was taken from World Bank, Current Account Balance rates
21 Look Figure 4. Data was taken from World Bank, Budget Deficit rates
22 Source: National Statistics. IMF. Economist Intelligence Unit
9

Because exports of most western Balkan economies are low, the portion of exports to
Greece relative to GDP is also honestly small in nearly all countries in that zone23. Consequently,
a possible supplementary deterioration in exports to Greece would not be expected to make
suffer for corresponding economies24.

Debt Crisis in Greece and Strategies for Reduction Crisis

Strategies and policies applied by Greek government in past 30 years have assisted to the recent
debt crisis. These strategies have caused the nearly entire des-industrialization of the economy
and desertion of the agricultural production. The agriculture production resembles only to 3.3 %
of GDP, while services to 78.8 % and industry to 17.9 % of GDP25.
In the time between 2001 and 2008, Greece noted budget deficits averaged 5 % per year,
in comparison to the euro zone average budget deficit of 2 % and in 2009 the budget deficit
fundamentally reached 15.6 %26. Also its account deficit averaged 9 % per year, compared to
euro zone average of 1 %. These shortages were sponsored by getting loan from international
capital markets, faced the country with tremendously high external debt: 129 % of GDP in
200927. When the crisis creates a direct threat to the solidity and strength of the European
monetary union, Brussels interfered, requesting the country to implement economic austerity
policy28. After the forces of the European Union authorities and recommendations of appropriate
world organizations, such as the IMF and the World Bank, the government declared tax increases
and a 30 % cut to the 2 month bonuses for the public workers29. Besides this, the Greek
23 Greek Crisis Undermined Balkan EU Accession Hopes, Ibid
24 Ibid
25 Migration and economic crisis: the case of Greece. In: Contribution to the
conference. Re-Integration centre for migrant workers, Bucharest, 17 Feb 2014
26Budget deficit for Western Balkan Countries (Source: EU Candidate and Preaccession Countries Economies Quarterly-CCEQ 2011)
27 Ibid
28 "The Second Economic Adjustment Programme for Greece (Fourth review April
2014)" (PDF). Page 55-59 European Commission. 23 April 2014.
29 Ibid
10

government declared a number of other actions and also accepted the proposal of euro zone
countries and the IMF to a 3 year loan package of 110 billion at an interest rate of 5.5 %30. The
Greek government accepted a financial partnership program for decrease the public debt and
ensures the structure for develop strength and evolution to the economy. It was expected that
Greeces first regulation strategy composed with these resources would create private capital
markets for Greece by the end of 2012, but these expectation miscarried when it was found that
this procedure may last more31.

Conclusion
The main objective of this research paper was to examine extent of the effects of a
universal crisis and an ultimate passing of the debt crisis on Western Balkan countries by
measuring and analyzing main macroeconomic indicators, such as GDP growth, unemployment
rate, and current account balance and budget deficit. The paper concluded on main research
question of To what extent financial crisis in Greece had impacted on main macroeconomic
relation and indicators of Western Balkan Countries? that the indicators such as the share of
local bank credits and current account deficit informs that there is a strong impact of the
occurrence of a financial crisis in Greece on the Western Balkan countries. It was determined by
the current economic and financial conditions in world, especially euro zone, which is highly
possible that there would be strong downturns in the forthcoming period in the Western Balkan
countries. In this case, positive side is that as a regard getting experiences from previous
unsuccessful strategies and policies, there can be of considerable value by allowing policymakers to acquire clear insights when and how to take pre-emptive plans in order to reduce or
even stop financial chaos.
At last, research concluded that banking and financial sector along with the external
sector as risk conduction ways may be extra influenced compare to real economy sector, mostly
in terms of possible weaknesses that could happen in an opposing scenario in countries with a
strong existent of Greek banks such as Albania, FYROM and Serbia.

30 Michael Winfrey and Renee Maltezou, Greeks March to Protest Austerity

Campaign, Washington Post, June 18, 2011
31 "The Second Economic Adjustment Programme for Greece, Ibid.
11

Tables and Charts

12

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13

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