In Greece’s Economic War of Attrition, Tsipras Counts on Peace

  • Prime minister bets confidence will return after aid deal
  • Businesses fear tax increases will squeeze growth even more

Alexis Tsipras.

Photographer: Jasper Juinen/Bloomberg

From street protests and collapsing governments to eleventh-hour deals and financial lifelines, Greece has gotten used to lurching from crisis to crisis during its endless economic meltdown.

QuickTake Greece’s Financial Odyssey

Prime Minister Alexis Tsipras is relying on it being different this time after finance ministers in the euro region agreed to disburse more funds and the European Central Bank on Thursday said it would be willing to let banks increase their access to its cheaper credit. Even Eurogroup head Jeroen Dijsselbloem, the face of Europe’s standoff with Tsipras last year, said “an important corner” had been turned.

For sure, more businesses in Greece say they have hit the bottom. There’s also more political impetus to get the job done after Tsipras, 41, turned from anti-austerity firebrand to submissive leader of a stricken nation. But similar talk has turned into false dawns during the six-year experiment in austerity. The cash injection into the economy will need to offset the latest round of tax increases.

“European partners are reassured by the fact that this government decided to bite the bullet and are signing pretty much what they are being offered,” said George Papaconstantinou, who was finance minister when Greece blew up in 2010 and it was forced to seek a rescue. “All fine and well, but it is not enough for the country, and it is not a turning point. I wish it were, but it’s not.”

Analysis: Greece’s Financial Odyssey

Greeks are about to feel another squeeze while their economy has done nothing to make up for its 25 percent contraction. Unemployment still sits well above 20 percent and labor market reforms will form part of the next bailout review.

Extra taxes on incomes and pay TV kicked in on June 1, with more to follow on coffee and Internet usage while pensions are being cut again. In the same week, a statistical office report showed that the economy shrank another 0.5 percent in the first quarter and retail sales slumped 4.3 percent in March. Reaching for a consolation beer also is more expensive after the government doubled a special consumption levy.

“It is very important for normal economic life to resume in Greece, especially in terms of credit and investment,” said Nicolas Veron, senior fellow at the Peterson Institute in Washington and the Brussels-based Bruegel research institute. “It’s going to be gradual, and it’s not going to be spectacular. The basic thought is: staying in the euro zone, macroeconomic stability, a sound banking system. I think we’re getting there.”

Greece’s banks, targeting a return to profitability this year, all reported improved first-quarter earnings. The ECB Governing Council is close to reinstating a waiver that would allow them to replace some of the emergency liquidity support they receive from the Bank of Greece with cheaper ECB money.

Survival Instinct

The banks remain weighed down by more than 100 billion euros of bad loans, much of them to businesses. The country’s healthy enterprises, though, have evolved to cope with extreme adversity, according to Nikos Magginas, senior economist at National Bank of Greece.

“The survivors are much more resilient than we expected,” Magginas said. “Now we have hit the bottom as regards the sustainability of the business sector.”

Dimitris Petalas, chief executive officer of Fourlis SA, which operates IKEA stores in Greece, told investors on a conference call he sees the positive elements of the latest aid deal that can offset the impact of the tax increases.

Other executives don’t see it. Andreas Andreadis, president of the Greek Tourism Confederation, said additional taxes over the past year wiped out competitive gains from Greece’s falling labor costs. Panos Papadopoulos, CEO of Forthnet SA, the biggest pay TV provider, said the “state will end up with losing significant revenues by imposing such excessive taxation.”

Debt Relief?

Tsipras is banking on a few months of political calm and the 10.3 billion euros of fresh loans to finally set the country on the road to health, and has said the country could even return to international bond markets before the end of 2017. Greece fell short of winning the debt relief he and the International Monetary Fund have been calling for, but bought some time. Ten-year bond yields last month briefly dipped below the threshold where countries were forced to seek aid during the European debt crisis.

The next review will come after the lucrative summer tourist season. It will attempt to tackle the labor market and reach agreement on a new program with the IMF, which says Greece’s budget targets are unattainable.

The government at least can pay off the backlog of arrears to suppliers, which stood at 6.7 billion euros at the end of March. The amount of time it takes for the state to pay bills has more than doubled in the past year to 115 days, according to a report by Intrum Justitia, Europe’s biggest debt collection agency.

The political landscape has also transformed since the last election in September following Tsipras’s summer capitulation over more austerity. While he rehired some state workers axed during the previous government and talked of restoring dignity to Greece, his Syriza party is now trailing in the polls to New Democracy, whose leader is seen as a champion for the economic reforms mandated by the euro region.

In the days after the May 24 aid deal, Alexandra Konstantopoulou already saw a slight pickup in business at her German book store in central Athens. “The level of security or insecurity out there has a massive psychological impact on people,” she said.

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