Domestic gloom contrasts with foreign confidence in economy

The post-Olympic anti-climax has not stemmed investment in Greek securities

By Dimitris Kontogiannis - Kathimerini English Edition

By talking to foreign investment bankers, fund managers, analysts and brokers, one gets a much more upbeat assessment of the Greek economic and corporate landscape than that perceived by the majority of their Greek counterparts.

Since both cannot be right, somebody is wrong. Who, then, is right and who is wrong? The optimistic foreigners who have expressed their confidence by buying stocks and bonds for quite some time, or the generally pessimistic Greeks who have a better view of everyday life here?

With the Greek economy surprising most pundits by cruising at a 4.2 percent GDP growth rate last year and the stock market, long regarded as a leading indicator of future economic and corporate activity, being a top performer among the developed bourses worldwide in 2004 and so far this year, the pendulum appears to be swinging toward the optimists’ camp.

This case is further strengthened by the published financial statements of listed companies. Indeed, turnover at all listed firms on the Athens Stock Exchange — a good indicator of the country’s corporate activity — increased by 11 percent in 2004 compared to a year earlier, although earnings before taxes and after minorities grew at a respectable, but still slower pace, of 7.1 percent according to data provided by EFG Eurobank Securities.

The sales growth rate remained intact at 11 percent even after excluding banks and other financials, while earnings before taxes and after minorities grew by 8.4 percent. A slight pickup in both sales and earnings growth to 12 and 9.4 percent respectively after excluding banks and construction companies from the universe of listed firms does not change the whole picture dramatically.

Yet the mood one encounters when talking to most Greek businessmen, bankers, fund managers and the general public is generally downbeat. Even top government officials, such as Prime Minister Costas Karamanlis, appear to reflect this reality when they talk about economic crisis at the same time as they see light at the end of the two-year tunnel.

Well, everything has an explanation. First, it is expectations. A good deal of the Greek public had unrealistically high expectations from the new conservative government that took over in early March 2004 after more than a decade in opposition. These expectations failed to take into account the structural shortcomings of the Greek economy, such as relatively low labor productivity in many sectors, and the gravity of the fiscal situation, aggravated by the government’s decision to record military expenditures using the cash-basis methodology. The fact that these expectations had been augmented by promises of better pay to civil servants and other groups and higher prices for agricultural products simply made things worse.

Second, it is the tendency of many Greeks to complain, even when the economy is running at a nice tempo and real incomes are rising, by focusing on weak areas such as the textile industry and other labor-intensive industries facing intense competition from abroad.

Under these circumstances, it is no surprise that commentators and others were talking about an economic crisis, although the local economy registered growth rates in excess of 3.3 percent for years. The fact that most other eurozone countries were scrambling to post 1.0 to 2.0 percent annual growth rates was either ignored or downplayed by pointing to Greece’s catchup effort. Furthermore, the same people were critical of the so-called austerity economic policies, shrugging off the fact that fiscal policy was accommodative and real incomes were rising, even at a small clip.

In addition to the two factors mentioned above, this time around Greek pessimism is founded on another fact: the expected economic slowdown after the Olympics, demonstrated more vividly by the slumping construction sector and related industries. The situation in those sectors has become more serious because of the state’s inability to pay construction firms for projects completed months ago. The ensuing liquidity squeeze and the expansion of the construction sector leading up to the Athens 2004 Olympics have resulted in tens of thousands of layoffs, estimated at 40,000 last year, and in unpaid personnel. Furthermore delays in the procurement of new public and concession projects has simply made things worse. A similar situation is found in the small-shop keepers, especially in apparel, who strive to compete with imports from China and other cheap labor destinations as well as large store chains offering a greater variety of products at lower prices.

The inability of the government to soften the combined blow of deteriorating expectations, ever-present complaints, problems in some key sectors and the feeling of a general economic slowdown has not done any good. Under pressure from the EU authorities to cut its budget deficit to below 3.0 percent of GDP by the end of 2006 from some 5.3 percent in 2004, the government has little space to maneuver. The only policy initiatives left to create momentum and change the economic sentiment involve restructuring state-controlled organizations, privatizations and attracting foreign direct investments.

All the above factors may be more or less known to foreign investment houses, brokerages and funds who view things differently, and who paint a much more optimistic picture. To them, Greece offers a unique story of restructuring both in the central government and at the corporate level. Privatizations, improved public finances and a GDP growth rate around 3.0 percent or more are all part of the menu served to their cash-rich clients all over the globe. Of course, fat fees and commissions are in the back of their minds, but no one should blame them for that since it’s their job.

Still, the question is: Who reads the Greek story correctly? The optimistic foreigners or the pessimistic Greeks? Perhaps they both read the situation correctly from their own point of view. However, only one camp is correct. Time will show which camp is right. However, history teaches that the outsiders who put their money where their mouth is usually have better judgment.