Since the onset of the financial crisis in the autumn of 2008, the global economic environment continued to worsen in the first quarter of 2009. It appears to be slightly easing in the second quarter. The Balkans is among the regions most adversely affected, reflecting dramatic GDP contraction and numerous external challenges (e.g. large current account deficits, shortfalls in foreign currency inflows and declining export capacity).

All countries in the region - with the possible exception of Albania - are expected to register a sharp output decline. Romania, Serbia and Bulgaria are particularly adversely affected. On average, GDP contraction will reach minus 3.2 per cent for the entire region in 2009. Such a freefall in their economies is only comparable to the initial transition period in the early 1990s.

International funding institutions have come to the rescue of eight countries in Central, Eastern and South East Europe. Between October 2008 and May 2009, they have provided about $108 billion of emergency lending to Romania, Serbia, Ukraine, Belarus, Hungary, Poland, Bosnia and Herzegovina and Latvia to weather the economic and financial crises. Other countries such as Albania, Croatia and Bulgaria are currently considering their options.

These interventions represent an unprecedented level of co-operation between the IMF, World Bank, EBRD and EU. They also expressed a powerful message; namely that East, Central and South East Europe, including the Balkans, has a safety net that will be extended across the regions by the international [financial] community!

The full extent of the financial sector crisis in the region has yet to translate into the real economy. Three areas are of particular importance:

(i)    credit volumes to households and the corporate sector remain conditioned by the risk of rising non-performing loans and eventual debt defaults;

(ii)    bank de-leveraging after years of excessive credit growth, in particular mortgages, consumer loans, corporate finance and credit card debt;

(iii)    uncertainty over the future engagement of Western parent banks – including Greek financial institutions - vis-a-vis their local subsidiaries in the Balkans.

The level of non-performing loans (NPLs) is currently the most important risk indicator for the stability of commercial banking in the Balkans.

Together with accelerated credit contraction rising NPLs exert significant burdens on banking operations in the region. It is only a matter of time until this combination of financial sector stress factors filter through into the real economy.

Social implications of the economic and financial crises

The economic contraction in the Balkans is re-ordering citizens’ assessments about their future expectations in areas such as employment, wages, welfare services and the availability of banking credit. In practice, austerity programs are gradually rippling down the social hierarchy, with adjustments taking place in every segment of society.

The rescue packages from the IMF, the World Bank and the EU include painful conditionalities that will have to be met with budget cuts and public spending limitations during 2009/10. The measures are primarily affecting public sector employees, reduced funding for cities and local administration as well as retirement benefits. The social implications of such conditionalities are dire and subject to public controversy.

One key indicator is remittances. According to the World Bank, money sent home by migrant workers to their families in the Balkans is set to fall by up to 13 per cent in 2009. The regional impact of lower remittances is further influenced by country-specific currency arrangements. Through the depreciation of domestic currencies, non-euro countries such as Albania, Bulgaria, FYR Macedonia, Romania and Serbia will be more adversely affected than Montenegro and Kosovo where the euro is legal tender.