Europe's Vulnerable East Braces for Possible Greek Exit

By GORDON FAIRCLOUGH And MARCIN SOBCZYK

The Wall Street Journal 

WARSAW—Authorities in Europe's emerging economies are girding for the possibility of serious market turmoil in the event of a Greek exit from the euro zone, which could drive down currencies, tighten credit and slam the brakes on export-driven growth.

Government officials and central bankers in the European Union's eastern wing say they are in better shape to weather any storm than they were four years ago when the collapse of U.S. investment bank Lehman Brothers sparked a global financial crisis.

But they are still vulnerable. Investors fearful that Greek elections next week will spark Athens's disorderly departure from the euro have already been selling Polish, Hungarian, Romanian and Czech assets, hitting local currencies and stock markets.

Hungarian Prime Minister Viktor Orban, whose heavily indebted country is considered especially at risk, said "work has begun" on strengthening defenses "so that such a quake doesn't bring Hungary down on one knee."

In Poland, where the economy is much healthier, the central bank governor, Marek Belka, said authorities are carefully monitoring the banking system and are prepared to supply liquidity—in euros and Polish zlotys—to shore up the financial system if needed.

"There are contagion channels, but the Polish economy is quite balanced and resilient," Mr. Belka said in an interview with The Wall Street Journal. "Nobody is immune, of course."

Countries in the region have limited direct exposure to Greece, except in the cases of Romania, where Greek banks have a significant presence, and Bulgaria, for which Greece is an important export market.

But if Greece's troubles worsen, analysts said it could spark a panicked flight by investors from emerging Europe into assets viewed as safer, dragging down regional currencies and push up borrowing costs for governments and companies in the region. A big move in exchange rates would hurt Polish, Hungarian and Romanian households that have loans denominated in foreign currencies.

Another major transmission route could be banks. Many banks in the region rely on euro-zone parents for funding. A disorderly Greek exit that triggers a wider financial crisis in Western Europe could seriously crimp available credit in some countries.

Then there is trade. If a Greek exit drags the euro-zone economy into a contraction, that will also bite the east's export-dependent economies, especially the Czech Republic and Hungary, small open economies closely tied to Western Europe.

Hungary's Mr. Orban has called on Poland, the Czech Republic and Slovakia to join hands to prevent parent banks from siphoning funds from subsidiaries in the region and to seek access to European Central Bank foreign-currency swaps.

So far, however, the response from Hungary's neighbors has been unenthusiastic. "An intergovernmental initiative isn't the proper thing to do here," said Mr. Belka. Such matters should be handled "between the ECB and national central banks."

"Of course, I would get worried if big European banks that happen to have subsidiaries here get in trouble," Mr. Belka said. "But the subsidiaries are reasonably fenced off, supervised by us, well capitalized and liquid." Poland's banking sector is about 70% foreign-owned.

Mr. Belka said he is bracing for a relatively prolonged period of uncertainty. "I think that whatever happens, it won't be on clear-cut date that will provide papers with a nice big headline, 'Greece out of the euro zone,'" he said. "The situation will evolve."

Among the options, Mr. Belka said, is that Greece could stay in the euro, but with its financial aid either cut off or reduced, and resort to some kind of temporary "internal payment instrument" that would be used in tandem with the common currency.

"Some people think muddling through is the best scenario because other scenarios are either unrealistic or disastrous," Mr. Belka said.

Write to Gordon Fairclough at gordon.fairclough@wsj.com

A version of this article appeared June 8, 2012, on page A8 in the U.S. edition of The Wall Street Journal, with the headline: Europe's Vulnerable East Braces for Possible Greece Exit.