With Greece’s fate in the eurozone hanging by a thread, several countries in Eastern Europe are worrying that the Greek crisis could spill across their borders.

Politicians fear Greece’s crisis could hit investors’ perception of Eastern Europe

Weekend talks between Greece and its European creditors appeared to be deadlocked, with eurozone finance ministers demanding even-deeper overhauls and cuts from the country before they take a decision on its future within the currency union.

But the escalation of the Greek turmoil, which led to the temporary closure of the Greek banks last month, has already sparked fears of contagion in the rest of the Balkan region in particular, due to its extensive banking, trade and tourism links with Greece.

“The destabilizing of Greece is bad news for us, as Greece is one of our main geopolitical and economic partners,” Radan Kanev, a member of the governing coalition in Bulgaria’s national assembly, said in an interview. “It will no doubt have economic repercussions for us.”

Beyond the short-term impact on their fragile economies, politicians and bankers in those countries worry about the hit the crisis will have on international investors’ perception of Europe’s poorer east.

A region that shook off communism and embarked on a difficult path to democracy in the 1990s, it has relied on foreign investments to raise living standards and catch up with rich West Europeans.

“It’s always bad when there is a fire in your neighbor’s house,” said Levon Hampartzoumian, chief executive of Bulgaria’s biggest bank,UniCredit Bulbank. “If the Greek crisis continues to escalate, Eastern Europe will again be seen as a crisis region and that is a difficult perception to shake off.”

As Greece has been in and out of recession in the past six years, countries in the region have already experienced some of the effects of the crisis and have fortified their banks and economy. But the outlook is far from certain.

In the Balkans, in particular, countries can’t afford to be complacent about the risk of contagion given their high exposure to the ailing Greek banks.

Greek-owned banks control more than a fifth of banking assets in neighboring Bulgaria, roughly the same as in FYROM. Greek banks also have a large presence in Romania, Albania and Serbia.

Dimitar Bogov, the governor of the FYROM central bank, said that Greek-owned lenders have seen a “small reaction with limited deposit withdrawals” after Greece imposed capital controls and shut its banks on June 29 but have since stabilized.

Still, the central bank introduced capital control restrictions preventing FYROM residents to invest or lend money to Greece as a “temporary measure,” Mr. Bogov said in an interview.

The Romanian central bank has asked the Greek-owned lenders in the country to “keep their Greek exposure low,” it said in response to questions. A spokesman for the National Bank of Serbia said it has been in communication with the European Central Bank and has intensified its supervision of the country’s four Greek-owned banks.

Bulgaria, meanwhile, is still reeling from an unrelated banking crisis last year when its fourth-biggest lender went under following a bank run. The country’s four Greek-owned banks, which are subsidiaries of National Bank of Greece SA, Alpha Bank SA, Piraeus Bank SA and Eurobank Ergasias SA, have seen limited capital outflows and remain stable so far, people familiar with the matter said.

“There are no indications of a banking panic in the county for now,” said Mr. Hampartzoumian of UniCredit Bulbank, which is owned by UniCredit SpA of Italy. “In the short term, local banks, even the Greek-owned ones, are well capitalized and ring-fenced from Greece. But looking longer term, it will all depend on developments in Greece.”

In May, the International Monetary Fund asked authorities in Southeastern Europe to ensure that subsidiaries of Greek banks have enough assets that they can exchange for emergency financing at their own central banks—in case financing from their parent institutions is suddenly cut off.

On the economic front, a deeper Greek recession could hit economic activity beyond its borders. Bulgaria sends around 7% of its exports to its southern neighbor, while Greece is the third-largest foreign investor in Serbia and Macedonia.

Greek tourists and shoppers are a lifeline for Bulgaria’s poor border regions. More than 1 million Greeks visited Bulgaria in 2014 and while official data isn't yet available for the past month, analysts say that with Greeks not being able to access their bank accounts, the tourism sector will be the first one to bear the brunt.

“The number of Greek tourists in Bulgaria since the capital controls were introduced is effectively zero,” said Georgi Angelov, an economist at Sofia-based think tank Open Society. “And if Greece were to exit the European Union, visas will be introduced and the trade will also suffer. It will be a logistical nightmare.”

Many in the region also rely on money sent by relatives working in Greece. Balkan migrants working in Greece number between 700,000 and 1 million, according to estimates by the Economist Intelligence Unit, a research advisory company. Two-thirds of them come from Albania, a country that relies on remittances for up to 12% of its gross domestic product, the EIU says.

The impact of the crisis beyond the Balkans seems to be smaller, for now, as countries in Central Europe have fewer economic or banking ties with Greece. But analysts say that all of Eastern Europe will take a hit in the eyes of international investors, especially in the case of a Greek exit from the eurozone.

“In Poland, Hungary and the Czech Republic concerns are mostly limited to the potential fallout of negative investor sentiment for their currencies and securities,” said Otilia Dhand, vice president of advisory firm Teneo Intelligence.

For its Balkan neighbors, Greece has always been something of a role model. That is about to change.

“Greece never had communism and was always the most developed country in the east, so it used to ‘sell’ the region,” Mr. Angelov said. “In the mind of international investors, Greece had long ago exited the unstable Balkans. Now it looks like it’s back.”

With Greece’s fate in the eurozone hanging by a thread, several countries in Eastern Europe are worrying that the Greek crisis could spill across their borders.

Weekend talks between Greece and its European creditors appeared to be deadlocked, with eurozone finance ministers demanding even-deeper overhauls and cuts from the country before they take a decision on its future within the currency union.

But the escalation of the Greek turmoil, which led to the temporary closure of the Greek banks last month, has already sparked fears of contagion in the rest of the Balkan region in particular, due to its extensive banking, trade and tourism links with Greece.

“The destabilizing of Greece is bad news for us, as Greece is one of our main geopolitical and economic partners,” Radan Kanev, a member of the governing coalition in Bulgaria’s national assembly, said in an interview. “It will no doubt have economic repercussions for us.”

Beyond the short-term impact on their fragile economies, politicians and bankers in those countries worry about the hit the crisis will have on international investors’ perception of Europe’s poorer east.

A region that shook off communism and embarked on a difficult path to democracy in the 1990s, it has relied on foreign investments to raise living standards and catch up with rich West Europeans.

“It’s always bad when there is a fire in your neighbor’s house,” said Levon Hampartzoumian, chief executive of Bulgaria’s biggest bank,UniCredit Bulbank. “If the Greek crisis continues to escalate, Eastern Europe will again be seen as a crisis region and that is a difficult perception to shake off.”

As Greece has been in and out of recession in the past six years, countries in the region have already experienced some of the effects of the crisis and have fortified their banks and economy. But the outlook is far from certain.

In the Balkans, in particular, countries can’t afford to be complacent about the risk of contagion given their high exposure to the ailing Greek banks.

Greek-owned banks control more than a fifth of banking assets in neighboring Bulgaria, roughly the same as in FYROM. Greek banks also have a large presence in Romania, Albania and Serbia.

Dimitar Bogov, the governor of the FYROM central bank, said that Greek-owned lenders have seen a “small reaction with limited deposit withdrawals” after Greece imposed capital controls and shut its banks on June 29 but have since stabilized.

Still, the central bank introduced capital control restrictions preventing FYROM residents to invest or lend money to Greece as a “temporary measure,” Mr. Bogov said in an interview.

The Romanian central bank has asked the Greek-owned lenders in the country to “keep their Greek exposure low,” it said in response to questions. A spokesman for the National Bank of Serbia said it has been in communication with the European Central Bank and has intensified its supervision of the country’s four Greek-owned banks.

Bulgaria, meanwhile, is still reeling from an unrelated banking crisis last year when its fourth-biggest lender went under following a bank run. The country’s four Greek-owned banks, which are subsidiaries of National Bank of Greece SA, Alpha Bank SA, Piraeus Bank SA and Eurobank Ergasias SA, have seen limited capital outflows and remain stable so far, people familiar with the matter said.

“There are no indications of a banking panic in the county for now,” said Mr. Hampartzoumian of UniCredit Bulbank, which is owned by UniCredit SpA of Italy. “In the short term, local banks, even the Greek-owned ones, are well capitalized and ring-fenced from Greece. But looking longer term, it will all depend on developments in Greece.”

In May, the International Monetary Fund asked authorities in Southeastern Europe to ensure that subsidiaries of Greek banks have enough assets that they can exchange for emergency financing at their own central banks—in case financing from their parent institutions is suddenly cut off.

On the economic front, a deeper Greek recession could hit economic activity beyond its borders. Bulgaria sends around 7% of its exports to its southern neighbor, while Greece is the third-largest foreign investor in Serbia and Macedonia.

Greek tourists and shoppers are a lifeline for Bulgaria’s poor border regions. More than 1 million Greeks visited Bulgaria in 2014 and while official data isn't yet available for the past month, analysts say that with Greeks not being able to access their bank accounts, the tourism sector will be the first one to bear the brunt.

“The number of Greek tourists in Bulgaria since the capital controls were introduced is effectively zero,” said Georgi Angelov, an economist at Sofia-based think tank Open Society. “And if Greece were to exit the European Union, visas will be introduced and the trade will also suffer. It will be a logistical nightmare.”

Many in the region also rely on money sent by relatives working in Greece. Balkan migrants working in Greece number between 700,000 and 1 million, according to estimates by the Economist Intelligence Unit, a research advisory company. Two-thirds of them come from Albania, a country that relies on remittances for up to 12% of its gross domestic product, the EIU says.

The impact of the crisis beyond the Balkans seems to be smaller, for now, as countries in Central Europe have fewer economic or banking ties with Greece. But analysts say that all of Eastern Europe will take a hit in the eyes of international investors, especially in the case of a Greek exit from the eurozone.

“In Poland, Hungary and the Czech Republic concerns are mostly limited to the potential fallout of negative investor sentiment for their currencies and securities,” said Otilia Dhand, vice president of advisory firm Teneo Intelligence.

For its Balkan neighbors, Greece has always been something of a role model. That is about to change.

“Greece never had communism and was always the most developed country in the east, so it used to ‘sell’ the region,” Mr. Angelov said. “In the mind of international investors, Greece had long ago exited the unstable Balkans. Now it looks like it’s back.”