Busi­ness cli­mate wors­ens

Financial Mirror (Cyprus) - - FRONT PAGE - By Costis Stam­bo­lis

As ne­go­ti­a­tions be­tween the Greek gov­ern­ment and the EU/IMF have reached a stale­mate fol­low­ing Athens’s out­right dis­missal of a new bailout of­fer from its cred­i­tors, time is run­ning out for a much needed agree­ment in or­der to stave off bank­ruptcy. A sit­u­a­tion which has wors­ened fol­low­ing a de­ci­sion by Prime Min­is­ter Alexis Tsipras not to go ahead with a EUR 335 mln pay­ment to the In­ter­na­tional Mon­e­tary Fund due last Fri­day (June 5). In­stead, Greece in­voked a lit­tle used op­tion, last taken by Zam­bia in the 1970s, to de­fer that pay­ment and three oth­ers to­talling EUR 1.6 bln un­til the end of the month.

But ac­cord­ing to re­li­able bank­ing sources in Athens it is be­lieved that the Greek Trea­sury will not have enough money at the end of June to pay both the IMF and state em­ploy­ees’ salaries and pen­sions, thus bring­ing the coun­try closer to bank­ruptcy, a sit­u­a­tion which now seems very real as the far left Syriza-led coali­tion gov­ern­ment stead­fastly re­fuses to agree to a new set of eco­nomic and ad­min­is­tra­tive re­forms, which, how­ever, is con­di­tional for the EU/IMF to ex­tend the present agree­ment and un­lock EUR 7.2 bln of bailout funds that Greece des­per­ately needs.

Although Greek gov­ern­ment sources claim that the non-pay­ment of the 300 mln IMF tranche was a po­lit­i­cal de­ci­sion, as the money was avail­able, and it should be seen more as a ne­go­ti­at­ing tac­tic, mar­kets in­ter­preted this move as a step closer to­wards the im­po­si­tion of cap­i­tal con­trols, ex­actly as it hap­pened in Cyprus in March 2013, and hence sent stocks tum­bling on the Athens Ex­change. Even worse off are the banks which are fast run­ning out of cash as de­pos­i­tors are with­draw­ing money out of their ac­counts on a daily ba­sis. So far, the Greek bank­ing sys­tem has re­mained afloat thanks to gen­er­ous ELA trans­fers from the Euro­pean Cen­tral Bank (ECB). Ac­cord­ing to bank­ing sources, more than EUR 3.0 bln have been with­drawn by ner­vous clients over the last two weeks with to­tal de­posits now stand­ing at record low of EUR 128 bln, with 20 bln alone hav­ing been with­drawn since Jan­uary this year. Bank of Greece fig­ures show that this is the low­est level of de­posits the coun­try has seen in 11 years. The cap­i­tal flight started last Oc­to­ber, when de­posits stood at EUR 164 bln, when it be­came clear that the coun­try was head­ing for early elec­tions and an un­charted po­lit­i­cal land­scape.

But grow­ing po­lit­i­cal and eco­nomic un­cer­tainty, and lack of liq­uid­ity in the bank­ing sec­tor have pushed pri­vate com­pa­nies to their lim­its as most of them are try­ing to pre­serve cash and are con­stantly post­pon­ing key man­age­ment de­ci­sions. This has brought busi­ness ac­tiv­ity to a stand­still as cash flows have dwin­dled with many com­pa­nies un­able to pay salaries and so­cial in­sur­ance due at the end of the month. A cli­mate of acute un­cer­tainty and de­spair is ev­i­dent among most com­pa­nies, mainly af­fect­ing the industrial and ser­vices sec­tors, while those ac­tive in tourism and agri­cul­ture ap­pear to be slightly bet­ter off. The coun­try seems to be at the mercy of public sec­tor trade unions which un­til now have dis­suaded a suc­ces­sion of Greek gov­ern­ments from im­ple­ment­ing much needed re­forms in the pen­sion sys­tem, public ad­min­is­tra­tion and the en­ergy mar­ket. With many Syriza MPs com­ing from trade unions, the gov­ern­ment looks determined to pro­tect the cur­rent sys­tem to the detri­ment of the pri­vate sec­tor which has suf­fered 1.3 mln job losses over the last five years, while public sec­tor em­ploy­ees – nearly 700,000 of them – are im­mune to any form of re­dun­dancy or loss of em­ploy­ment.

With a fast con­tract­ing pri­vate sec­tor and more than 6,000 en­ter­prises hav­ing closed down since Jan­uary, eco­nomic growth in Greece will amount to no more than an anaemic 0.1% this year, ac­cord­ing to the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment (OECD) which in its lat­est re­port has re­vised its fore­cast for the Greek econ­omy down from 2.3% six months ago. How­ever, even that mar­ginal growth, warned the OECD, de­pends on Greece reach­ing an agree­ment with its cred­i­tors, as the lack of a sat­is­fac­tory deal would lead to “fur­ther sig­nif­i­cant con­trac­tion of out­put and in­come of house­holds”. The big chal­lenge for the Greek econ­omy re­mains the im­ple­men­ta­tion of re­forms, and any fail­ure will lead to a con­trac­tion in gross do­mes­tic prod­uct. The fore­casts is­sued on June 3 are much lower than those pub­lished in Novem­ber, when OECD an­tic­i­pated 2.3% growth for this year and a 3.3% ex­pan­sion in 2016. Now, it ex­pects the 2015 GDP to grow just 0.1% be­fore the econ­omy ex­pands 2.3% next year.

It is clear, note OECD sources, that the tar­gets for in­vest­ment and strength­en­ing con­sump­tion have been un­de­ter­mined by the credit con­di­tions and the low con­fi­dence in the econ­omy, while the benefits from the in­crease in com­pet­i­tive­ness are not big enough to push ex­ports for­ward un­less they are ac­com­pa­nied by no-non­sense struc­tural re­forms in or­der to lift the bar­ri­ers to com­merce and in­vest­ments.

Mean­while, the cash-strapped Syriza gov­ern­ment has halted pay­ments to all com­pa­nies in­volved in public pro­cure­ment projects but also to in­di­vid­u­als, i.e. tax re­turns, thus drain­ing the econ­omy of any liq­uid­ity. This in­cludes pay­ments for a num­ber of Euro­pean Com­mis­sion­sub­sidised projects in Greece which have been se­verely de­layed in re­cent months dur­ing the cru­cial pe­riod just be­fore their com­ple­tion, ac­cord­ing to the As­so­ci­a­tion of Greek Con­struc­tion Com­pa­nies (SATE).

The pay­ment de­lays have hit ma­jor projects such as high­way con­ces­sions all the way down to smaller public works in­clud­ing the con­struc­tion of sewage net­works and schools. “State projects around the coun­try are fail­ing apart as they see work stop one af­ter an­other due to the fi­nan­cial con­straints of constructions firms,” a SATE state­ment warned on Mon­day.

As the present cash cri­sis is reach­ing a cli­max, it has started af­fect­ing oth­er­wise fi­nan­cially sound com­pa­nies.

Se­nior man­agers of en­ter­prises in­volved in ex­port ori­ented in­dus­tries, such as tourism, oil and min­er­als, which ap­pear to have suf­fered the least from an ever wors­en­ing re­ces­sion­ary cli­mate, point out that Greek risk is act­ing as a strong dis­in­cen­tive for cus­tomers abroad, let alone in­vestors, who do not show much ap­petite for do­ing busi­ness with Greek com­pa­nies.

“At times, there is a feel­ing of ut­most de­spair as the coun­try’s fi­nan­cial and liq­uid­ity prob­lem is con­stantly rais­ing bar­ri­ers all around and pre­vents us from car­ry­ing out much needed in­vest­ments, thus drain­ing our re­sources and un­der­min­ing our long term growth prospects,” said a se­nior manager in one of Greece’s ma­jor oil com­pa­nies.

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