Greece's service-based economy has been less exposed to the global downturn than elsewhere in Europe, but a positive outlook for 2009 will largely depend on how the tourist industry performs and whether lines of credit will remain available to smaller businesses. Writer Kerin Hope

Greece still hopes to avoid falling into recession in 2009, with current forecasts indicating the economy will grow by between 0.2% and 0.5%. But after more than a decade of growth averaging 4% yearly, the global slowdown is already having a wrenching impact.

In January, Standard & Poor's downgraded Greece's credit rating from A to A-, citing Greece's ballooning public debt, the eurozone's second highest, at 94% of gross domestic product (GDP). The downgrade, the first of a eurozone member since the start of the financial crisis, damaged Greek credibility on international markets, helping push spreads over German Bunds to about 300 basis points (bps).

Yet appetite for Greek debt remains strong. Greece has already covered 80% of this year's €45bn refinancing requirement, with spreads easing to about 250bps. Recent auctions of five-year bonds were heavily oversubscribed. With interest rates at about 5.5%, the cost of borrowing in nominal terms is the same as last year, easing the burden on the budget.

Yiannis Papathanassiou, finance minister of Greece

Shipping suffering

Thanks to its service-based economy, the country is less exposed to the downturn than other EU member states, although the shipping sector has been hit by a dramatic fall in freight rates and the tourist industry saw a fourth-quarter decline in arrivals in 2008. Greece cannot afford a stimulus package because of its high debt and budget deficit, but the government should be able to draw down more than €3bn this year under the current EU structural aid package.

Achieving positive growth in 2009 will depend on how the tourist industry performs, says Yiannis Papathanassiou, Greece's finance minister. "The start of the season has seen bookings down 20% to 25%, but a surge in late bookings has been a feature of previous downturns. We are still optimistic that we'll be able to outperform the forecasts."

Tourism contributes about 17% of GDP and is the country's biggest employer. Keeping credit lines open to hoteliers and tour operators, as well as smaller tourist businesses, will be critical this season, according to industry lobby groups.

Ensuring continued access to lending for more than 600,000 small and medium-sized businesses that drive the Greek economy is a priority for the government. But demand for loans is shrinking as consumption slows and the business environment worsens. Banks have tightened credit criteria and cut back on unsecured lending. The central bank has already cut its credit expansion target of 10% for 2009 to 7% to 8% as the annual inflation rate decelerated in the first quarter, hitting a historic low of 1.3% in March.

"We definitely need more liquidity in the private sector. If we don't finance the real economy, then basically healthy companies with temporary problems run the risk of closing and many jobs will be lost," says Mr Papathanassiou.

Support package

To bolster liquidity and ensure Tier 1 capital ratios are above 10%, the finance ministry launched a €28bn support package for Greek banks, based on measures taken by other eurozone member states. It consists of €5bn in capital injections, to be paid back within five years; €8bn of liquidity in the form of special government bonds; and €15bn of state guarantees for banks to issue fresh debt.

Greek banks managed to escape exposure to assets that turned toxic, thanks to strong recent earnings, fuelled by sustained growth in mortgage lending and high margins on loans by subsidiaries in the fast-growing economies of south-east Europe. But with loan-to-deposit ratios of about 120%, big banks were hard hit by the international credit crunch.

Most banks opted to participate in the package following guidance from the Bank of Greece, the central bank. The four big lenders - National Bank of Greece (NBG), EFG Eurobank, Alpha Bank and Piraeus Bank - all signed up to receive capital increases that would bring their Tier 1 capital ratio into double digits after bargaining with the finance ministry over conditionality.

The terms include a ban on cash dividends and share buy-backs, as well as a ceiling on executive salaries. A state-appointed commissioner will sit on each bank's board, with full access to the books, and report back to the finance ministry on a monthly basis.

Fresh capital

Alpha and Eurobank have each taken up €950m of fresh capital in the form of non-voting preferred shares. Piraeus took €370m and NBG €350m. Three state-controlled lenders - Agricultural Bank, Postal Savings Bank and Attica Bank - signed up for €675m, €225m and €100m, respectively.

The perceived costs of staying out of the plan were highlighted when Crédit Agricole decided in February to inject €850m of fresh capital into Emporiki Bank, its loss-making Greek subsidiary.

With a loan-to-deposit ratio of 95% last December and €5bn in excess liquidity, National Bank of Greece, the country's biggest lender, could have opted out of the scheme.

Takis Arapoglou, NBG's chairman and chief executive, says: "We believed the whole banking system should support the provision of liquidity in a uniform way, so we participated in the capital increase."

NBG may use only a small part of the liquidity facilities, given the strength of its balance sheet, leaving weaker players to absorb the bulk of the package, he adds.

Other banks have snapped up liquidity bonds, which can be used as collateral for cheap funding from the European Central Bank (ECB). Banks have also used Greek government debt as collateral for the ECB, supporting the refinancing effort while making a profit on the interest differential.

But only €1bn of the state guarantee allocation has so far been taken up, with Alpha and EFG Eurobank each launching a single €500m issue.

Michael Masourakis, chief of strategy at Alpha Bank, says: "Our plan was to use €2.6bn of state guarantees, but they have proved a bit problematic. Financial conditions have deteriorated significantly since the package was launched. In this market, issuing debt is very expensive, even with the backing of the Greek state."

Banks are trying to persuade the finance ministry to retool the package, either by converting the state guarantees into liquidity bonds, or by using them directly to back loans to small and medium-sized businesses. There is pressure, too, for the ministry to extend its deadline for banks to take up funding.

Takis Arapoglou, NBG's chairman and chief executive

New challenges

Other challenges lie ahead. Greece has a difficult task to convince the European Commission that it can bring its public finances under control. The 2008 budget deficit came in at 4.7% of GDP, compared with a target of 1.6%. Analysts are not convinced a 12-month public sector wage freeze, with longer-term measures to cut health spending and curb tax evasion, will be enough to reduce the deficit below the 3% of GDP eurozone limit in 2010, as required by the Commission. Further fiscal tightening may be needed.

After a decade of headlong growth in retail and small business lending, as Greece played catch-up with the other south European eurozone member states and expansion accelerated in the Balkans, the banks are pausing for breath. Yet the big four are all expected to stay profitable this year, in spite of the domestic slowdown.

Nicholas Nanopoulos, chief executive of EFG Eurobank, says: "We're looking at a difficult year, but not a disastrous one. There is a question mark over tourism and private construction is declining, but on the other hand, EU funds or infrastructure are starting to flow. Overall in Greece, in terms of macroeconomic impact, we are in relatively better shape than is generally perceived."


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