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Greek default is becoming imminent. Last week the country won an approval for a 3.2 million Euro loan from IMF and the European Union, a fraction of its 340 billion Euro debt. However, the new bailout package has not yet been agreed.
It has also now emerged that Italy’s national debt is at 120 percent of gross domestic product (GDP), the second highest in the Euro zone after Greece. Whilst Italy is considered unlikely to default because of the strength of its economy and long-term debt structure, its economic difficulties can add to the Euro crisis.
So what does this mean for Eastern European outsourcing?
Recession in Western Europe / World
If Greece defaults, markets will panic and this will make ongoing funding for Ireland, Portugal, Italy and Spain much more expensive and limited. This may trigger a new recession, resulting in a revenue drop for Eastern European nearshore outsourcing companies.
What can be done? Outsourcing companies in Eastern Europe will benefit from serving companies in industries unaffected by economic downturn (for example aerospace, energy, healthcare, discount goods).
Slowing down of Eastern European economies
Almost 30 percent of Bulgaria’s banks and 12 percent of Romania’s are owned by Greek financial institutions (e.g. Piraeus Bank, Alpha Bank). Greek lenders own 15 to 25 percent of the banks in Macedonia, Serbia and Albania. Greek and other European banks who face losses as a result of this default will reduce their lending in Eastern Europe. This will put loan-funded expansion plans on hold for outsourcing firms and will greatly affect local markets for the outsourcing and technology businesses.
What can be done? While EBRD leads the efforts to persuade the lending community to maintain their commitment to the Eastern European region, the Eastern European outsourcing and technology companies may reinvigorate their efforts to expand their international trade with the more stable economies such as Germany, the banks of which hold only 17 billion Euros in Greek debt.
Inevitably, an economic downturn will cause the labour market to cool down . For outsourcing companies in Eastern Europe this means better recruitment results for clients and an opportunity to restructure and improve their outsourcing operations.
Greece may appear as a new European nearshore outsourcing destination. The local economy in Greece is shrinking as a result of dried-up financing and unemployment is rising. The Greek government has approved austerity measures which will include eliminating 150 000 government jobs. Local businesses will look to the international markets for new sources of income. Lower salary expectations, European location and good standards of education will make Greece an attractive nearshore destination in the not so distant future.
Contact us if you need advice on outsourcing destinations and best vendors in Eastern Europe.
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vita at goaleurope dot com