Greece has a tentative rescue deal, but relief that it is not falling out of the euro is unlikely to last long: its economy has taken a huge hit.
Months of political brinkmanship, uncertainty and bank closures have hurt companies and brought everyday business to a standstill. And new economic measures meant to secure the bailout are forecast to put the country, which emerged last year from six years of economic crisis, through more misery.
“No one is producing. No one is buying. Everyone is scared,” said 59-year-old Dimitris Farmakis, who has a cloth-making firm in Athens.
On top of a slump in demand, Farmakis’ business is hit hard by a government limit on money transfers that makes it impossible to buy supplies from overseas. He’s cut down on production and given his staff time off.
“In a few weeks we won’t be producing due to these shortages,” Farmakis said.
Farmakis’ woes are commonplace in an economy that analysts estimate will contract by about 4 per cent this year.
That’s a big reverse from just six months ago, when it had emerged from one of the most savage recessions the developed world has seen in modern history. Its public finances were also healing and the country was even considering financing itself once again on international bond markets.
Rip up that script.
Greece fell back into recession in the spring amid growing uncertainty over the country’s future in the euro in the wake of the election triumph of the radical left Syriza party in January. As the bailout talks dragged on, concerns became more acute and the recession deepened, evidence suggests. The government’s decision over two weeks ago to shutter all banks, impose limits on cash withdrawals at ATMs for Greeks, and restrict electronic transfers abroad dealt a huge blow to an economy that was already reeling.
Bankruptcies are on the rise: bad loans on banks’ books are expected to surge to account for 40-45 percent of all loans, from 35 percent in December, according to Moody’s credit rating agency.
Money has been pulled out in droves from the country over the past months of uncertainty. Deposits hit an 11-year low in May and analysts say it will take time for investors to find the courage to plow money back into the country, even if it has a rescue deal.
Meanwhile, the budget savings the government will have to make to get the financial bailout from its European creditors will hurt economic growth. They include, among other things, tax increases that are likely to dent spending.
“Greece has already gone through (a) depression,” said Megan Greene, chief economist at Manulife Asset Management. “This ensures they’ll go through three more years of recession if it’s implemented.”
The Greek government, and many experts, say the bailout deal is needed to avoid the even worse scenario of a complete collapse in Greece’s banks, which would push the country out of the euro. Economists estimate that if Greece falls out of the currency union, its economy could shrink by another 10 or 20 per cent.
The government also notes that the bailout deal will ensure the country’s funding for three years and ease its debt burden.
In the short-term, it is needed to help the banks reopen, a priority for the economy to start breathing again.
Imports in Greece have been hammered by the limits on money transfers that the government imposed two weeks ago to prevent a bank run. Business owners are warning there could be shortages of basic goods such as food if the situation isn’t resolved and banks aren’t reopened.
Exporters are also experiencing problems as many are unable to buy raw materials from abroad, while others say they cannot pay for agricultural products.
“It’s a huge problem, we’re now only receiving from abroad the products that have already been imported and paid for,” said Natassa Voudouri, owner of Contlift, which transports goods from shipping containers around Greece. “From here on, things get harder … The reason is that no money transfer can be sent abroad from Greece. At the moment we’re taking delivery of the last goods, which is food. All the rest is frozen and we’re expecting product shortages.”
Pantelis Kourbelas, owner of fashion company Ioanna Kourbela, which exports to 25 countries, is being creative as he tries to import thread and material from Italy and France.
“If we can’t buy raw materials because we can’t send money abroad we will have a problem,” said Kourbelas, 62, who is also on the board of the Athens Traders’ Association. “We’re thinking of opening a bank account in another European country and all our transactions with clients who buy from us to be done through that account. That’s the only way we can ensure the continuation of production.”
While a rescue deal could allow Greece to ease its money controls somewhat, the country is unlikely to be able to undo them completely — the last eurozone nation to impose such controls, Cyprus, took two years to lift them fully.