Business climate worsens
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 According to banking sources, more than EUR 3.0 bln have been withdrawn by nervous clients over the last two weeks with total deposits now standing at record low of EUR 128 bln, with 20 bln alone having been withdrawn since January this year.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.