The country’s private sector is caught in a death spiral. ESPA infrastructure investments are not materializing and liquidity taps are drying up whilst foreign investment is not materializing, at least not until the country’s solvency situation is clarified. Typically, the “flagship” Fast Track Hellenikon former airport privatization plan is being moved to 2013-2015. In the meantime household consumption does not appear to be recovering, household bank reserves are being shifted abroad, and the state continues to withhold payments — as such there is no prospective source for new spending. On the external front, the emerging depressed growth throughout Europe is diminishing hope for a recovery led by tourism, shipping and exports.

7 out of 10 businesses in Greece are planning to reduce employee salaries and 1 in every 3 are planning to reduce staff levels whilst sales are dropping dramatically, even for export businesses, and the lack of cash flow creates an asphyxiating climate, with 70% of all business predicting that 2012 will be worse. These are the summary findings of a study carried out by IOBE, the Foundation for Economic and Industrial Research, and presented by IOBE at a press conference on 13th December 2011, covering the 2.000 largest businesses in the country employing approximately 3.000 people.

More specifically, 70% of the 2.000 largest businesses in the country are planning to reduce employee salaries (this is not the first reduction), 28% to reduce employee numbers, whilst more than 52% of businesses expect a reduction in sales in the next 12 months, hot on the heels of the cumulative sales reduction 20% between 2009 and 2010. The number of domestic investments is also predicted to drop by 50% across the board.

“The lack of cash flow has now been compounded by the lack business confidence for the country and its businesses, which makes the situation far worse” as stated by the vice president of the Greek Industrialists Association (ΣΕΒ) Haris Kyriazis, whilst the General Director of IOBE, Giannis Stournaras underlined that if the endeavor to restructure the economy does not succeed, the economic crisis may transform itself into a social crisis.

The study, carried out from April to July 2011, with the collaboration of the National Polytechnic University and opinion pollsters Public Issue, verified that the economic crisis has affected the entire private sector. All businesses appear to be experiencing a cash flow problem basically because their customers are also experiencing that very problem themselves (48%) but also because of the lack of access to credit from the banking system (36.5%).

The lack of access to credit from banks is decisive for the construction industry where more than 60% of construction companies surveyed declared that they are experiencing serious problems. This sector is also experiencing a greater exposure to the crisis because of, amongst other things, the refusal to pay for services rendered and goods supplied by a prime customer, the Greek Public Sector, as well as the vastly reduced request for services and goods from that customer. This is sometimes referred to as an “internal payments freeze”, which knowledgeable observers consider a standard Finance Ministry method to engineer budget targets for Troika auditors.

Manufacturers are experiencing serious cash flow problems due to demands for more immediate payments to their overseas suppliers ( a consequence of declining foreign confidence in Greece’s solvency) and due to pressure from low cost competitors, whilst the shift by consumers to cheaper categories is one of the main problems faced by hotels and restaurants.

The main line of defense for businesses for the next twelve months is the containment and reduction of salaries, according to 69% of respondents, cutbacks in bonuses and indirect benefits (34%), reduction in prices (34%), adjustments to working time (34%) and a reduction in employee numbers (28%). Export businesses seem to be weathering the crisis better as they appear to be making up for losses in the domestic market.

According to the study, 54% of export businesses predict an increase in sales in 2011, 87% of these however state that the increase will not exceed 10%. Only 45% of the 2.000 largest businesses in the nation have an export positioning. For manufacturing businesses however, the corresponding proportion is 70%. Businesses that do export attribute 30% of their turnover to export income. It remains an open question, however, as to how profitable these exports have become.

In total, businesses sampled indicated decreases in sales of 11% for 2009/10 and predict a further decrease in sales of 7% in 2011. 52.3% of businesses declared that the current year will close with a decrease in sales and only 10% anticipate an increase.

In the area of domestic investments, the number of investment plans has dropped by 50%, whilst their value by has dropped by 40% for the current year compared to last year. In manufacturing, the reduction in investments is of the order of 29%. For the period 2009-2010, the investment value of companies sampled was of the order of 5.16 billion euro. Nevertheless it is notable that 73% of businesses that plan to carry out investments in 2011-2012 closed the year with a profit in 2010, that two out of every three businesses which plan to carry out investments of over 1 million euro in 2011-2012 had also carried out sizeable investments in 2009-2010 and that 63% of those planning to carry out investments of over 1 million euro in the period 2011-2012 predict that their sales this year will increase or remain constant. These are the survivors, clearly with deeper pockets than most Greek companies.

The survey also found that building activity plunged in August this year. The number of new building permits decreased by 14.2% compared to the corresponding month last year, and that based on total building quantity, private building activity receded by 11.4%. Over the 8 month period January – August, the number of building permits dropped by 30.5% in comparison with the corresponding period in 2010, whilst the total building quantity decreased by 37.3%.

In light of these findings, the Troika and Horst Reichenbach’s EU Task Force have already expressed their concerns for the consequences of this continuing private sector death spiral on the economy and society as a whole since it not only feeds unemployment, but places a time bomb at the foundations of the tax revenue structure.  In parallel, it increases the need for social security/unemployment expenditures and makes an exit from the tunnel increasingly remote.

Bureaucratic red tape remains untouched…as do the “closed shop professions” which have not been deregulated, the country remains a European leader in public sector corruption according to the recent report released by Transparency International with low productivity and an ever changing and complex tax structure.

As for inflation, despite the fact that Greece has been experiencing negative growth for the last 4 years, it is currently running at 5.5% with significant price increases on basic commodities which in turn undermine productivity and competitiveness.  The lack of a fully competitive market in Greece is one cause of this not-unexpected phenomenon, the other being the barrage of new taxes which have over recent months raised prices despite many business owners’ declared efforts to hold the line. For early 2012 we can expect new energy taxes will generate another spike in inflation, further undermining Greece’s export competiveness, whilst the private sector, the only hope for real economic recovery, continues in the path of an asphyxiating death spiral.Image

This entry was posted in Greek economy, Task Force for Greece, Troika and tagged , , , , by Solon. Bookmark the permalink.

About Solon

First coming to prominence for his patriotic exhortations when Athens was fighting a war against Megara for possession of Salamis, Solon, a lyric poet who came from an aristocratic family which traced its ancestry back 10 generations to Hercules was elected eponymous archon in 594/3 B.C. Solon faced the daunting task of improving the condition of debt-ridden farmers, laborers forced into bondage over debt, and the middle classes who were excluded from government, while not alienating the increasingly wealthy landowners and aristocracy. His eventual just reform measures pleased neither the revolutionaries who wanted the land redistributed nor the landowners who wanted to keep all their property intact. Instead, he instituted the seisachtheia by which he canceled all pledges where a man's freedom had been given as guarantee, freed all debtors from bondage, made it illegal to enslave debtors, and put a limit on the amount of land an individual could own. No less daunting are the reform challenges faced in Greece today.


  1. Facing these hard truths is painful. Greece may take a decade or more to pull out of this morass. Your analysis can not be faulted. I wish there was some upside to point out right now going into the festive season. Maybe Christmas / New Year will be a more heartfelt family time even if dark with foreboding time for many Greeks this season. Greeks have survived much worse than this and will survive this with their fighting spirit intact.

  2. A comprehensive analysis of the current macro economic situation. Clearly the future is grim. Why this is the case seems only partly explainable by typical policy issues (EG excessive public servants) or bureaucratic issues (EG excessive red tape and corruption). Further analysis of the underlying cultural/social factors which have led Greece into its current situation would be a valuable contribution to this piece. In addition it would identify the key issues which require addressing if Greece is to turn things around. The economic issues outlined above will not be solved long term by adopting typical Keynesian solutions or by borrowing more abroad.

  3. The statsitics are quite confronting. I agree with the previous bloggers that cultural issues, which are fundamental to the current suituation, are not discussed in any detail.

    Aside from the cultural issues, there appears to be numerous reasons why Greece is facing their current financial woes, part of which would include the provision of generous holiday bonuses, receiving the 13 th and 14 th month salaries, family members collecting pensions on behalf of ‘deceased family members’, early and multiple pensions, expansive (and unaccountable) public service and broad scale tax evasion – this is part of what is reported in the media abroad!

    While many of these issues are now being addressed, I only hope that it is not a case of too little, too late?

    While all of the above (and more) occurs in varying degrees within most overseas nations (perhaps not in China?), there is generally the strength of the economy to absorb this activity.

    As a greek living abroad, it pains me to hear and read of the state of the greek economy and sincerely hope that ALL Greeks can begin to work together towards a united front in addressing the underlying issues.

  4. Interesting and informative article, as mentioned in another comment, other variables could also be included such as social aspects or the euros impact on the European-Greek market. Other than that it is a good analysis of Greece’s issues.

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