In 1930s, Rebecca West writing about the Balkans said "I hate the corpses of empires, they stink as nothing else." Back in that decade, Austria-Hungary Empire and the Ottoman Empire had just collapsed. The Balkans was in chaos, just like today. It seems that the smell of a closed era have spread all over the Balkans. Just as West said, the smell in the air is unbearable. Nowadays, the Balkans lives in the economic crisis climate. With this economic crisis, the global crisis has for the first time attained a different feature unique for countries like Turkey. We have to follow up the developments in the Balkans attentively, for three reasons. Let us first see what is going on in the Balkans nowadays.

The climate in the Balkans has changed whereas people were enjoying their lives just a few years ago. Bankers from Austria, Italy, and Switzerland were touring around the region and extending credit both in Euros and Swiss Francs. Balkan countries, whether EU member or not, were rapidly growing. People were hopeful about the future. Then, the crisis came and affected the performance of each country. Unlike the recent discourse we are used to see, the crisis did not arrive in the Balkans solely as a financial crisis through balance sheets of banks.  First, the real sector was affected; cash balances were distorted for everyone. Distortion in the cash balances began to obstruct payments. It shall be noted that everyone was indebted in foreign currency terms due to the nature of the credits extended. As the demand for foreign currency increased at national level, local currencies started to depreciate rapidly. Thus, it became harder to pay the debt in foreign currency. This further distorted the cash balance and things tended to jump the track.

The first party to acknowledge that things are not going well was the Austrian banks. But, it was too late. For almost four months, meetings followed one another in Vienna. Total credit amount Austrian banks extended to the Balkan countries corresponded almost to 75 percent of Austria's national income. This rate stood around 30 percent for Italy; but it was still high. The crisis of the real sector in the Balkans stood for a banking crisis in the EU. Let us remember the banking crisis in the EU. It emerged from the balance sheets of the US banks and then jumped to the European banks due to joint operations. Now, top it all off, the real sector crisis in the Balkans turned into a banking crisis in the EU. This was where Germany stepped in. Germans started to argue that the EU shall raise funds and intervene in the region.

The developments in the Balkans are important for Turkey under three aspects. First, the crisis in the Balkans shows how the global crisis will affect countries like Turkey. Contagion effect does not work the same in the core and the periphery. The crisis in the core emerged from the balance sheets of banks and spread to the real sector. In peripheral countries like Turkey, however, the crisis will emerge from the real sector and then affect the balance sheets of banks. This is the first point. The developments in the Balkans shall give us some clues. Second, by examining the Balkan experience, it is also possible to have information on how a crisis emerging from developing countries shall be tackled. In this context, the intervention signal from Germany is extremely important. To limit the impact of a crisis emerging from a peripheral country, developed countries shall step in with resource transfers between states. This crisis cannot be managed by the market mechanism. Third, the crisis in the Balkans will result in a rise in the risk premium for Turkey in the short run. The hurricane emerging from the Balkans was a result of the foreign currency denominated debt in the balance sheets of domestic parties. It will be wise to expect that foreign currency denominated debt of Turkey will become an issue as a result of the developments in the Balkans. In the upcoming period, it will be necessary to expect that an issue which was not prominent enough until recently will gain more prominence.

The smell over the Balkans at the beginning of the twenty first century is disturbing, as was at the beginning of the twentieth century. This time, the source of the problem is not a series of tools developed using political witchery, but the credits in their literal meaning. The Balkans is the debtor. And a series of Western European banks, especially Austrian banks, are the creditors.  The developments in the Balkans will be quite instructive for the future of Turkey. So, it is wise to monitor those attentively.

This commentary was published in Referans daily on 21.02.2009