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Financial Crisis Update - Greece

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The prevailing sentiment in the Greek political and banking circles seems to be that the country is somehow shielded from the economic downturn experienced all over the word. To an extent, this belief is somewhat justified, as the Greek banking system seems to have remained underexposed to so-called "toxic waste" investments (U.S. real estate related debt).

This argument is further supported by the fact that historically, the spread between the cost of money for the banks and the rate at which they loaned it has been one of the largest in the EU, making them very profitable indeed. One last argument supporting this way of seeing things is that the Greek economy, as a whole, does not rely heavily on exports.

But why does all this hold true? Admittedly, for example, the largest Greek bank, the National Bank of Greece, is not exposed to "US toxic investments", not because of its foresight, but mainly because at the time it focused its energies and attention towards the acquisition of Finansbank in Turkey, which now comprises a large percentage of its asset base. Should things not go well in Turkey, its balance sheet will no doubt take a big hit. Most other banks in Greece also expanded through acquisitions in the Balkans, Russia and Ukraine. Although a strategically sound call at the time, that tactic may now prove wrong, should these economies fail.

The lucrative business of keeping deposit rates low and loans expensive, has drained the buying capacity of the average consumer, as well as the solvency of a great number Greek businesses, while driving the Greek Economic Climate Index, as reported by DG ECFIN at 72.9 for the month of October - a new historical record low (source: http://www.iobe.gr/media/oik_syg/october_2008.pdf).

While not an industrial country, and therefore not heavily relying on exports, Greece does rely on international services, such as shipping and tourism, which have historically been called "Greece's industry". With consumers cutting back on non essentials, tourism will undoubtedly take a hit and if business conditions remain weak, so will shipping. A third byproduct of tightening budgets worldwide will probably be the departure of some international business from Greece, due to downsizing - Tate & Lyle, to name one fairly known franchise, has already left Greece, closing down their Thessaloniki facility and rerouting their customers to their facility located in neighboring Bulgaria.

Although the Greek government has maintained that no new taxes will be levied for 2008, it has already announced that the tax exemption of the first 9,500 Euros of income will not apply to professionals for this fiscal year, effectively taxing almost half of the nation's ca. 900,000 self employed with an estimated added tax of 1,000 Euros per person. In fact, this is by far one of the cruelest taxation measures ever taken in any European country - and that's before the crisis even hits Greece!

Despite the political consensus to the contrary, Greece is very much exposed to the international financial crisis, in fact even more so than described here. If business conditions do not improve globally, then the strategy of debt-based economic expansion will be very heavily questioned by bondholders globally, a fact already starting to show as the spread between German and Greek bonds is once again on the rise; which may make debt financing costly for the government in the near future or even at least partially unavailable, in a worst case scenario.

Are things that bad? Not really - in fact the government and the banking system are now better equipped than ever before to handle a financial crisis. But this may not prove enough of a safety margin and it has been accomplished by drawing liquidity and buying power from the average consumer, creating some of the conditions necessary to create a purely Greek crisis within the international crisis. Whether that happens or not is anyone's guess at this time, but the pessimism prevailing on the street is indeed unprecedented.

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