ECONOMY

This time Greeks will feel the impact from economic crisis

The international financial crisis has been raging for more than a year but a good many Greeks came to learn about it last week when the sharp drop in stock market indexes, coordinated interest rate cuts by the European Central Bank (ECB) and other major central banks and concerns about local bank deposits caught the attention of the local media like never before. Still, the average Greek has little knowledge about the causes of the global credit crisis and the possible impact on his life next year and beyond. In previous times, he was lucky; this time, however, that may not be the case. «The Greeks were lucky. They did not really get what was going on abroad until the last phases of past crises. They were usually coming to terms with it when the crisis ended or was about to end and did not feel the pinch that much,» says the chairman of a small private bank. «This perhaps has made us somewhat complacent and may explain our attitude toward the current crisis.» Complacency rooted in history may be one explanation, but there are more. The Greek economy is a rather closed economy, which is insulated to some extent from external shocks due to its large inflows from the European Union. Moreover, it has been helped by its stronger trade and other economic links with the fast-growing neighboring emerging markets. Although Greece does not enjoy the kind of boost from monetary policy denoted by the lowest lending interest rates in generations, like it did during the 2001-2003 period, it still benefits from the billions of euros in EU money funding various investment projects. The fact that it has become more efficient in absorbing these EU funds works to its advantage. In addition, Greece, an oil-importing nation, stands to benefit from the sharp drop in world oil prices and other commodities, as the global financial crisis gets deeper. So far, the country has also benefited from its closer economic ties with neighboring emerging markets which continue to expand quickly. «Greece is lucky because it does not have developed financial markets,» said the general director of a private equity fund. Moreover, the Greek economy does not depend so much on financial markets. Studies show that more than 70 percent of the wealth of the average household is tied up in real estate and not in stocks, bonds and other financial instruments traded on the local and world markets. Despite a drop in turnover, lower home prices and an oversupply of new houses, the Greek real estate has not suffered the kind of recession seen in the USA, the UK, Ireland and Spain. In other words, so far so good. Unfortunately, the country has yet to experience the full headwinds of the fast economic slowdown in its major eurozone partners and the consequences of a much tighter credit policy adopted by a growing number of local banks. History teaches us that it takes some time for a recession or substantial economic slowdown to show its effects on Greek shores and such will be the case this time around. So, slower merchandise export growth at best and a stagnation in tourist revenues should be expected next year, hitting the relevant local industries. Things may get worse than have yet been expected if the global crisis hits the neighboring emerging markets with large current account deficits. In that case, the repercussions will be greater, since thousands of Greek firms receive a portion of their revenues from operations in these countries. In addition, the freeze in world credit and inter-bank markets has forced large and small Greek banks with fewer deposits than loans to scramble for new deposits. In the process, these banks are raising their lending rates on mortgages and consumer and corporate loans to pass on the higher cost of funding, discouraging new applicants. The combination of higher lending rates and tighter credit criteria is surely going to lead to fewer loans ahead, undercutting consumption and investment spending. Higher interest rates on time deposits and the sense of a major financial crisis engulfing economy after economy in a globalized world is also expected to undermine Greek consumer spending next year. With the economic consequences of the financial crisis yet to unfold in many European economies, it is unlikely the Greeks will be lucky this time around. The severity of the crisis is such that a mere 2.5 percent GDP growth will feel like a recession in a country accustomed to high growth rates over the last 16 years or so.