ECONOMY

Small and very small firms are vital to any economic recovery

If so many pundits are right and the global economy begins a slow recovery from its worst financial crisis since the 1930s at some point later this year, Greece would certainly benefit. However, whether or not it succeeds in avoiding its first economic recession since 1993 depends largely on the survival of tens of thousands of small and very small companies, where, according to bankers and other experts, a domino effect of bankruptcy is a real possibility over the next four or five months. Although the first signs of tourist arrivals are not that bad, since foreign arrivals were up some 15 percent in April compared to the same period a year earlier, bankers and businessmen paint a bleak picture of the financial health of the majority of small firms, many of which do business in the tourist sector. In their opinion, these firms are not in good shape and could tip the economic balance toward recession or anemic growth. The financial health of these small firms is very important for the Greek economy, unlike in other eurozone countries where large firms account for the bulk of employment. There are some 800,000 companies in Greece of which more than 790,000 are small or very small in size, about 6,000 are middle-sized businesses and some 400 large ones, according to bankers familiar with data provided by business research firm ICAP. The critics of this Greek business model claim that these firms, mostly family-owned, account for a great deal of the country’s tax evasion and receive generous treatment from politicians of all stripes because they command hundreds of thousands of votes. They argue that these small firms represent the core of the Greek underground economy, implying that the failure of a good number of them will cause pain in the short-term but benefit the economy in the medium-term. This is because it will help limit tax evasion, since larger firms, which are more easily audited, will pick up their turnover. On the other hand, the supporters of this model point to the flexibility shown by small firms during difficult economic times and the employment of hundreds of thousands of people. Although small firms are prone to tax evasion, no one should doubt their importance to the Greek economy. By all means, many of these firms appear to be going through hard times. This is due to two factors: First, demand for their products and services has waned as consumers have become more thrifty, facing greater uncertainty at work and a dismal economic environment dominated by news about tax hikes and recession in many economies abroad. Second, some 600,000 firms are estimated to have relied on commercial credit provided to them by larger companies to keep on going over the years. As the larger companies also face difficulties, they have cut back on commercial credit or making their terms more strict. Also, some of the larger firms, fearful that some of the smaller ones may go bust, have been trying to turn them over to the banking system for funding. But the banks are not granting loans if they do not meet their credit criteria and this makes it even more difficult for them to weather the economic storm. Bankers and businessmen do not rule out a domino effect if consumption does not pick up in the next four to five months and commercial credit to tens of thousands of small companies is not restored. Since many of these small firms are active in or related to the tourist sector, they think the health of tourism will play a big role in the future. The hospitality industry has been going through tough times, with many small hotels closed in April and even May. However, tourism is not the only industry in which many small firms and even medium-sized firms are active. Many are active in the construction or related industries, which have fallen into recession for a number of months due to the over-supply of new homes. Other small firms are active in services, such as retail sales, and logistics, where warehouses are full of inventories of unsold goods. The risk of a domino effect where the bankruptcy of one firm may bring down five or 10 or 20 more due their interdependence is a real possibility, as bankers and businessmen admit. The impact of such a domino effect on the Greek economy would be large enough to send it into its first recession since 1993 and that has to be avoided. There are no magic solutions to cope with the situation. The government should aim at targeted relief measures to boost demand for firms in problematic sectors in order to lessen the impact in the same way it did with the car dealers. It should also try to provide state guarantees for banking loans to viable small firms in the form of TEMPME-II loans. The necessary business catharsis should not be confused with widespread bankruptcies or loan defaults at such a demanding time.