The European Central Bank is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation.
The ECB would provide access to its refinancing operations, offering euros to the banking system against eligible collateral, the people said, asking to remain anonymous because the matter is confidential. The ECB and the Bulgarian central bank declined to comment.
Eastern Europe is at risk of tremors from Greece via ties ranging from trade to finance, with lenders from the debt-ridden country owning almost a third of banking assets in Bulgaria. The possibility of Greece abandoning the euro after shutting banks and imposing capital controls has left eastern European currencies among this week’s worst emerging-market performers.
“The threat of ‘Grexit’ has understandably cast a dark cloud over the outlook” for the region, London-based Capital Economics Ltd. said last week in a note. “Ties with Greece are sizable in a few places, including Bulgaria and Romania.”
Bulgaria and its banks have been a main focus of concern for European Union officials looking at potential fallout from the Greek crisis in the region, according to people familiar with their thinking. Yields on euro-denominated Bulgarian government debt due 2024 were little-changed at 3.15 percent Friday, having risen during the past week on Greek concerns.
“The Bulgarian economy is stable and expanding, our banks are liquid and can deal with any situation,” President Rosen Plevneliev said in Sarajevo on Friday, according to an e-mailed statement by his press office. “Bulgaria is well prepared and we’ll pass through any crisis in the region, including the Greek one.”
This isn’t the first time the ECB performed a role as an anchor to smaller EU countries around the currency bloc. For example, at the height of the global financial crisis in October 2008, the institution loaned as much as 5 billion euros ($5.6 billion) to Hungary’s central bank.
While Bulgaria’s lev is pegged to the euro, Romania’s leu has weakened 0.6 percent against the common currency this week. Talks between Romania’s government and the EU over a precautionary loan broke down last month, heightening the danger from Greece as an existing facility expires in September.
With developments in Athens also jeopardizing the euro-area economy, eastern Europe’s biggest trading partner, Poland’s zloty has lost 0.4 percent this week and Hungary’s forint 0.9 percent.
The four largest Greek lenders all have units in Bulgaria and Romania. Piraeus Bank SA, Eurobank Ergasias SA, the National Bank of Greece and Alpha Bank AE hold 28 percent of total assets in Bulgaria, while about 12 percent of Romanian banking assets are owned by Greek lenders, central bank data show.
Bulgarian authorities said in 2014 that they’d seek ECB supervision for the nation’s lenders after runs on deposits sparked its worst financial crisis in 17 years. The decision followed a similar move by Romania. ECB oversight is automatic for the 19 countries using the euro.
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