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Panayotis Kapopoulos*

Emporiki Bank

Sophia Lazaretou**

Bank of Greece



Between 1996 and 2003 emerging market economies all over the world experienced major financial crises with both high frequency and severity. Since then and till the recent bout of financial turbulence initiated by the sub prime crisis in the US, the drop off in the frequency of such crises has been notably marked. However, the absence of a crisis episode does not in any case mean that there are not some potential risks looking forward. In this paper we use the theoretical framework of international banking and the sovereign risk calculus in an effort to study the experience of the Greek banks in SEE over the last decade. A trivial way to do that is viewing it as the product of two factors. The first factor refers to the ‘value at risk’, namely the banks’ ‘exposure’, and the second to the probability of a ‘sovereign risk event’. We focus on both factors. First, we find that lending concentration is high. Second, by using the well known capital asset pricing model (CAPM) and implementing a two step identification process, we detect a diversification effect of this concentration risk. Third, we study the country specific features that may determine a high probability of a ‘sovereign risk event’. We place an emphasis on the countries’ fiscal structure in a comparative perspective. We find that although all countries in the sample have made efforts towards a successful fiscal consolidation – largely supported by strong growth and low real interest rates – the empirical evidence, however, is suggestive of a weak link between public debt sustainability and the short-run conduct of fiscal policy.


Key words: emerging SEE economies, banking exposure, sovereign risk, public debt dynamics

JEL classification: H3, G1, G2


Acknowledgements: Special thanks are due to Alina Blejan, Kalina Dimitrova, Yüksel Görmez, Gjergji Mano, Milan Sojic and Risan Shllaku for kindly providing a part of macroeconomic data for Romania, Bulgaria, Turkey, Albania and Serbia. Without their help, this paper would not have been possible. The paper has been presented in the SSEM Euro Conference 2010 on the Challenges and Opportunities in Emerging Markets, Milas, Turkey, 16-18 July. We are grateful to all conference participants for their remarkable insights and especially to Ahmet Faruk Aysan, Mustafa Disli, Ali Kutan and Ravikesh Srivastava. An earlier version was presented at the 3rd SEE Economic Research Workshop, co-organized by the Bank of Greece and the Bank of Albania, in Athens on 19-20 November 2009. We are grateful to all workshop participants for their valuable comments and suggestions and especially to our discussant Panayotis Chronis and to Theodore Papaspyrou and Thomas Scheiber. Special thanks should be attributed to Heather Gibson for her comprehensive comments that improved considerably the paper. We are also grateful to Ioannis Papadakis for a fruitful discussion and encouragement. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Emporiki Bank and the Bank of Greece. We alone are responsible for the remaining errors and omissions.



*Risk Management Division, email: kapopoulos.p@emporiki.gr

** Economic Research Department, email: slazaretou@bankofgreece.gr

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