Greek tragedy threatens Western Balkan stability

For the Western Balkans, the global financial crisis has exposed a plethora shortcomings in its transition to free market economics and resolution of outstanding disputes.

By Ian Bancroft

For the countries of the Western Balkans – like elsewhere in Europe – the slow road to recovery from the global financial crisis has been further complicated by the emergence of Greece’s own debt crisis. Fears of contagion linger over the region, with Serbia particularly exposed to problems affecting the Greek banking sector. Bosnia-Herzegovina and Kosovo, meanwhile, are the most vulnerable to a resurgence of inter-ethnic tensions, fueled and fermented by challenging socio-economic conditions. The region’s complicated inter-connectedness – where developments in one part have profound ramifications elsewhere – mean that it remains susceptible to contagion of its own.

In March last year, the International Monetary Fund (IMF) agreed to provide Serbia with €2.9 billion to weather the effects of the global economic downturn. The loan – which has primarily been used to strengthen Serbia’s hard currency reserves and reduce its budget deficit – required that steps be taken to reform and reduce the country’s public administration, including the freezing of public sector wages and pensions. Though the country officially emerged from recession in the first quarter of 2010 (with GDP growth of 1.5 percent expected for 2010), external shocks threaten to undermine any recovery.

The rapid expansion of Greek banks in recent years has left Serbia more exposed than most to the Greek debt crisis. Four banks in Serbia are majority-owned by legal entities from Greece – Alpha Bank Serbia, Eurobank EFG, Piraeus Bank and Vojvodjanska Banka – which together constitute around 16 percent of its banking sector. As spreads on Greek sovereign debt have widened, so the reduced availability of liquidity has threatened to impact Greek lending operations in the Balkans. Although ‘stress tests’ suggest that Greek banks are currently well capitalised, extremely high loan-to-deposit ratios make a degree of caution inevitable. Any future capital outflows will constrain the availability of credit, especially for business, consumer and mortgage lending. With significant doubts about the Serbian government’s capacity to respond to such a scenario, the Greek debt crisis could negatively impact Serbia’s financial sector and growth forecasts, particularly as Greece was its second largest foreign investor from 2000 to 2008.

Serbia’s currency, the Dinar, meanwhile, has lost some 32 percent of its value over the past eighteen months, further compounding the country’s economic problems, especially for the sizeable number of businesses and consumers whose borrowings are denominated in Euros. With only a small number of export-oriented companies capable of benefitting from the resulting competitiveness gains, devaluation-driven export growth has remained weak. Though the central bank has intervened in an effort to stabilize the currency’s value, continued speculation suggests that such actions will achieve little; other than to dilute the country’s hard currency reserves, which have been bolstered by loans from the IMF.

These economic problems are beginning to have political ramifications. Dissatisfaction with the governing coalition continues to mount, with the Serbian Progressive Party (SNS) – founded by the former Serbian Radical Party presidential candidate, Tomislav Nikolic – now rivalling the Democratic Party (DS) – led by Serbia’s president, Boris Tadic – for the mantle of most popular party in Serbia. Though rhetorically pro-European in orientation, the SNS are likely to pursue a tougher stance on accession, particularly where Kosovo is concerned. The SNS continue to push for early elections, arguing that the current governing coalition has badly mishandled the economic crisis, leaving some 720,000 citizens living below the poverty line.

With parliamentary elections not scheduled until 2012, however, there is little to suggest that even the more frustrated members of the disparate governing coalition (such as the Party of United Pensioners of Serbia, who seek higher pensions) will be willing to risk going to the polls early given the current socio-economic situation. Whether the SNS can ultimately form a governing coalition will depend upon whether it can turn its polling figures into electoral support (opposition parties polled strongly prior to the 2008 general elections, but ultimately lost out to the Tadic-led ‘For a European Future’ coalition) and negotiate an agreement with the Democratic Party of Serbia (DSS), led by former prime minister, Vojislav Kostunica. The SNS’s growing base of support, however, suggests that Serbia can expect to move politically to the right in the very near future.

Though less exposed to potential Greek contagion due to an absence of Greek banks, Bosnia-Herzegovina’s economy has suffered greatly from the global downturn. Its economy contracted by 3.5 percent in 2009 and unemployment continues to hover around the 40 percent mark. Though Bosnia-Herzegovina’s currency board system – whereby the Convertible Mark remains anchored to the Euro – means that the country’s export-sector, albeit limited, has benefited from the Euro’s depreciation (exports rose over 25 percent in the first quarter of 2010), its external debt has risen by some 5 percent as a result of the decline. Furthermore, the value of foreign direct investment has declined approximately 25 percent year-on-year.

Bosnia-Herzegovina last year secured a €1.2 billion three-year stand-by arrangement from the IMF, with two-thirds of the support earmarked for the Federation of Bosnia-Herzegovina, one of the country’s two entities, and the remaining third going to the Republika Srpska. Under the IMF’s testing terms, Bosnia-Herzegovina’s respective levels of government must reduce their consolidated budgets by a combined total of €348 million, with the Federation expected to contribute the bulk of the savings, equivalent to more than one-fifth of its 2009 budget.

The Federation’s failure to enact necessary public spending reductions have continued to jeopardize the entire country’s access to IMF assistance. In April, police in Sarajevo used teargas to disperse 5,000 protesting war veterans who attacked the Federation government building in opposition to planned changes to the criteria governing their benefits payments. According to the Federation’s prime minister, Mustafa Mujezinovic, whose resignation has been sought by the protesters, “if we translate all of this to real-life consequences, it will mean that the IMF standby arrangement will be suspended, the [federation] budget will have 335m Bosnian marka less (approximately €171 million) and we shall not be able to pay 400,000 pensioners”. With vital World Bank support also at risk, these events risk sparking a spiral of protests involving other aggrieved and vulnerable groups.

Doubts remain about the political will and capacity of the Federation to implement the IMF’s fiscal stipulations. The Federation has long lagged behind the Republika Srpska in terms of economic reform, having failed to streamline both administrative regulations and social transfers. Several recent attempts at privatisation – including Duhana Mostar, a tobacco manufacturer, and Bosnalijek, the country’s largest pharmaceuticals firm – have failed to attract sufficient investor interest. The global financial crisis has therefore only served to both magnify and exacerbate the Federation’s defects.

The Federation’s dysfunctionality has further compounded Bosnia-Herzegovina’s existing structural weaknesses and economic viability. Should IMF support be withheld due to the Federation’s failings, the resulting economic and political crisis would impede efforts to find a mutually-acceptable constitutional settlement. With inter-ethnic tensions described as being at their worst since the end of the war, there are fears that the deteriorating economic situation could spark a wave of social protests that would further destabilize the country. With elections scheduled for October, little progress is expected on the reform front in 2010 and strong pre-election rhetoric will only further inflame feelings of friction and fragmentation.

For Kosovo, a trade deficit of some €1.7 billion in 2009 and an estimated unemployment rate of 43% demonstrate the plight of its economy. With approximately 30,000 young people entering the labour market each year, its economy is simply unable to create jobs at a sufficient rate to mitigate social tensions. Serbia continues to boycott products bearing custom stamps marked with ‘the Republic of Kosovo’ as opposed to ‘UNMIK’ (the UN’s Interim Administration Mission in Kosovo), the only body Serbia regards as being legally-authorized (in accordance with UN Security Council resolution 1244) to represent Kosovo in regional fora. With allegations of corruption and organized crime, combined with its dilapidated energy and transport infrastructure, continuing to deter foreign investment, Kosovo is likely to remain dependent upon donor support and remittances for the foreseeable future.

For the Western Balkans, the global financial crisis has exposed a plethora shortcomings in its transition to free market economics and resolution of outstanding disputes. Though Serbia has shown signs of emerging from recession, its long-term economic recovery remains vulnerable to external circumstances. In Bosnia-Herzegovina and Kosovo, meanwhile, a growing crisis of legitimacy, derived from dire socio-economic conditions, will continue to incite politicised ethnic assertiveness. Instability in one part of the region is likely to prompt instability elsewhere, such is the inter-linked nature of the Balkans. With several EU member states demonstrating a tougher stance on future enlargement, the countries of the region therefore risk poisoning their own accession prospects by failing to shake-off their reputation for instability.

Ian Bancroft is the co-founder of TransConflict and a regular columnist for The Guardian on Western Balkan affairs.

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Greek tragedy threatens Western Balkan stability

By Ian Bancroft

For the countries of the Western Balkans – like elsewhere in Europe – the slow road to recovery from the global financial crisis has been further complicated by the emergence of Greece’s own debt crisis. Fears of contagion linger over the region, with Serbia particularly exposed to problems affecting the Greek banking sector. Bosnia-Herzegovina and Kosovo, meanwhile, are the most vulnerable to a resurgence of inter-ethnic tensions, fuelled and fermented by challenging socio-economic conditions. The region’s complicated inter-connectedness – where developments in one part have profound ramifications elsewhere – mean that it remains susceptible to contagion of its own.

In March last year, the International Monetary Fund (IMF) agreed to provide Serbia with €2.9 billion to weather the effects of the global economic downturn. The loan – which has primarily been used to strengthen Serbia’s hard currency reserves and reduce its budget deficit – required that steps be taken to reform and reduce the country’s public administration, including the freezing of public sector wages and pensions. Though the country officially emerged from recession in the first quarter of 2010 (with GDP growth of 1.5 percent expected for 2010), external shocks threaten to undermine any recovery.

The rapid expansion of Greek banks in recent years has left Serbia more exposed than most to the Greek debt crisis. Four banks in Serbia are majority-owned by legal entities from Greece – Alpha Bank Serbia, Eurobank EFG, Piraeus Bank and Vojvodjanska Banka – which together constitute around 16 percent of its banking sector. As spreads on Greek sovereign debt have widened, so the reduced availability of liquidity has threatened to impact Greek lending operations in the Balkans. Although ‘stress tests’ suggest that Greek banks are currently well capitalised, extremely high loan-to-deposit ratios make a degree of caution inevitable. Any future capital outflows will constrain the availability of credit, especially for business, consumer and mortgage lending. With significant doubts about the Serbian government’s capacity to respond to such a scenario, the Greek debt crisis could negatively impact Serbia’s financial sector and growth forecasts, particularly as Greece was its second largest foreign investor from 2000 to 2008.

Serbia’s currency, the Dinar, meanwhile, has lost some 32 percent of its value over the past eighteen months, further compounding the country’s economic problems, especially for the sizeable number of businesses and consumers whose borrowings are denominated in Euros. With only a small number of export-oriented companies capable of benefitting from the resulting competitiveness gains, devaluation-driven export growth has remained weak. Though the central bank has intervened in an effort to stabilize the currency’s value, continued speculation suggests that such actions will achieve little; other than to dilute the country’s hard currency reserves, which have been bolstered by loans from the IMF.

These economic problems are beginning to have political ramifications. Dissatisfaction with the governing coalition continues to mount, with the Serbian Progressive Party (SNS) – founded by the former Serbian Radical Party presidential candidate, Tomislav Nikolic – now rivalling the Democratic Party (DS) – led by Serbia’s president, Boris Tadic – for the mantle of most popular party in Serbia. Though rhetorically pro-European in orientation, the SNS are likely to pursue a tougher stance on accession, particularly where Kosovo is concerned. The SNS continue to push for early elections, arguing that the current governing coalition has badly mishandled the economic crisis, leaving some 720,000 citizens living below the poverty line.

With parliamentary elections not scheduled until 2012, however, there is little to suggest that even the more frustrated members of the disparate governing coalition (such as the Party of United Pensioners of Serbia, who seek higher pensions) will be willing to risk going to the polls early given the current socio-economic situation. Whether the SNS can ultimately form a governing coalition will depend upon whether it can turn its polling figures into electoral support (opposition parties polled strongly prior to the 2008 general elections, but ultimately lost out to the Tadic-led ‘For a European Future’ coalition) and negotiate an agreement with the Democratic Party of Serbia (DSS), led by former prime minister, Vojislav Kostunica. The SNS’s growing base of support, however, suggests that Serbia can expect to move politically to the right in the very near future.

Though less exposed to potential Greek contagion due to an absence of Greek banks, Bosnia-Herzegovina’s economy has suffered greatly from the global downturn. Its economy contracted by 3.5 percent in 2009 and unemployment continues to hover around the 40 percent mark. Though Bosnia-Herzegovina’s currency board system – whereby the Convertible Mark remains anchored to the Euro – means that the country’s export-sector, albeit limited, has benefited from the Euro’s depreciation (exports rose over 25 percent in the first quarter of 2010), its external debt has risen by some 5 percent as a result of the decline. Furthermore, the value of foreign direct investment has declined approximately 25 percent year-on-year.

Bosnia-Herzegovina last year secured a €1.2 billion three-year stand-by arrangement from the IMF, with two-thirds of the support earmarked for the Federation of Bosnia-Herzegovina, one of the country’s two entities, and the remaining third going to the Republika Srpska. Under the IMF’s testing terms, Bosnia-Herzegovina’s respective levels of government must reduce their consolidated budgets by a combined total of €348 million, with the Federation expected to contribute the bulk of the savings, equivalent to more than one-fifth of its 2009 budget.

The Federation’s failure to enact necessary public spending reductions have continued to jeopardize the entire country’s access to IMF assistance. In April, police in Sarajevo used teargas to disperse 5,000 protesting war veterans who attacked the Federation government building in opposition to planned changes to the criteria governing their benefits payments. According to the Federation’s prime minister, Mustafa Mujezinovic, whose resignation has been sought by the protesters, “if we translate all of this to real-life consequences, it will mean that the IMF standby arrangement will be suspended, the [federation] budget will have 335m Bosnian marka less (approximately €171 million) and we shall not be able to pay 400,000 pensioners”. With vital World Bank support also at risk, these events risk sparking a spiral of protests involving other aggrieved and vulnerable groups.

Doubts remain about the political will and capacity of the Federation to implement the IMF’s fiscal stipulations. The Federation has long lagged behind the Republika Srpska in terms of economic reform, having failed to streamline both administrative regulations and social transfers. Several recent attempts at privatisation – including Duhana Mostar, a tobacco manufacturer, and Bosnalijek, the country’s largest pharmaceuticals firm – have failed to attract sufficient investor interest. The global financial crisis has therefore only served to both magnify and exacerbate the Federation’s defects.

The Federation’s dysfunctionality has further compounded Bosnia-Herzegovina’s existing structural weaknesses and economic viability. Should IMF support be withheld due to the Federation’s failings, the resulting economic and political crisis would impede efforts to find a mutually-acceptable constitutional settlement. With inter-ethnic tensions described as being at their worst since the end of the war, there are fears that the deteriorating economic situation could spark a wave of social protests that would further destabilize the country. With elections scheduled for October, little progress is expected on the reform front in 2010 and strong pre-election rhetoric will only further inflame feelings of friction and fragmentation.

For Kosovo, a trade deficit of some €1.7 billion in 2009 and an estimated unemployment rate of 43% demonstrate the plight of its economy. With approximately 30,000 young people entering the labour market each year, its economy is simply unable to create jobs at a sufficient rate to mitigate social tensions. Serbia continues to boycott products bearing custom stamps marked with ‘the Republic of Kosovo’ as opposed to ‘UNMIK’ (the UN’s Interim Administration Mission in Kosovo), the only body Serbia regards as being legally-authorized (in accordance with UN Security Council resolution 1244) to represent Kosovo in regional fora. With allegations of corruption and organized crime, combined with its dilapidated energy and transport infrastructure, continuing to deter foreign investment, Kosovo is likely to remain dependent upon donor support and remittances for the foreseeable future.

For the Western Balkans, the global financial crisis has exposed a plethora shortcomings in its transition to free market economics and resolution of outstanding disputes. Though Serbia has shown signs of emerging from recession, its long-term economic recovery remains vulnerable to external circumstances. In Bosnia-Herzegovina and Kosovo, meanwhile, a growing crisis of legitimacy, derived from dire socio-economic conditions, will continue to incite politicised ethnic assertiveness. Instability in one part of the region is likely to prompt instability elsewhere, such is the inter-linked nature of the Balkans. With several EU member states demonstrating a tougher stance on future enlargement, the countries of the region therefore risk poisoning their own accession prospects by failing to shake-off their reputation for instability.

Ian Bancroft is a co-founder of TransConflict (www.transconflict.com), an organization undertaking conflict and post-conflict transformation projects and research throughout the Western Balkans , and a regular columnist for The Guardian on Western Balkan affairs.

Ian Bancroft is a co-founder of TransConflict (www.transconflict.com), an organization undertaking conflict and post-conflict transformation projects and research throughout the Western Balkans, and a regular columnist for The Guardian on Western Balkan affairs.

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