Bloomberg News

Drachma Threat Confronts Greeks as Nation Teeters on Precipice

December 28, 2011

Dec. 21 (Bloomberg) -- Athens restaurant owner Mike Zoulas says generations of his family have paid the price for a divided Europe and now is the time to fight to keep it together.

His German grandmother fled Konigsberg, now the Russian enclave of Kaliningrad, ahead of advancing Soviet forces in 1945. His Greek father fled Smyrna in Turkey with his mother in 1922 for Thessaloniki. His father left Greece again in 1946 during the Greek civil war, arriving in the U.K. with a five- pound note before finding work in France, Brazil and Germany.

“Sometimes you just have to dig in,” said Zoulas, a 46- year-old father of three who opened his eatery in the Greek capital in July as European Union leaders pledged a second rescue package for Greece’s indebted economy. “Migration isn’t an option. My family has moved too many times.”

Looming economic collapse has become a way of life for Greeks as they weigh permanent cuts in wages and pensions against acceptance, emigration or a defiance that may lead to expulsion from the euro. Doubts that Greece can stay the course have destroyed confidence in Europe’s ability to deal with the debt crisis, swelling the borrowing costs of countries like Italy and Spain and sparking market speculation that the euro area will disintegrate.

“Greece is really skating on the edge,” said Thomas Costerg, an economist at Standard Chartered Bank Plc in London. “The fundamental issue is that there isn’t much buffer against potential shocks in the bailout program. The last thing we need in Europe is Greece to take center stage again.”

‘Only Chance’

Ensuring Greece keeps the euro is the job of Prime Minister Lucas Papademos, the former European Central Bank vice president who helped steer the country into the currency a decade ago.

Unemployment is close to a record, with more than 40 percent of those aged under 24 out of work. The economy is set to shrink for a fifth year, the worst slump since World War II, and Greeks are sending bank deposits abroad at the fastest rate in at least a decade.

Seven general strikes have shut down the country this year, leaving garbage piling up in the streets and stranding travelers. Angry protesters have attacked politicians at public gatherings and outside the Greek Parliament, pelting them with yogurt and eggs, and calling them traitors.

“Greece belongs to Europe and there is no concept of Europe without Greece,” Papademos told lawmakers in parliament in Athens on Dec. 6. “But our participation in the euro means rules and obligations that must be abided by.”

Asset Deterioration

Abandoning the euro would make the situation infinitely worse, Papademos says. Inflation accompanying the adoption of a new currency would hurt worker incomes; servicing euro- denominated debt would be more difficult, if not impossible; and the value of public and private Greek assets would plummet.

“The country has to try and stay in the euro area at all cost, with anything it takes,” said Kostas Dimitrokalis, 53, an hotelier on the island of Santorini. “It is the only chance, and the last probably, for Greece to be able to call itself a member of the European family and not the third world.”

EU and International Monetary Fund creditors say an overhaul of everything from labor rules to how taxi licenses are granted will bring lasting fiscal stability and transform a Greek state that ran up debts that may almost double the size of the economy in 2013 without action.

Implementing those changes is no easy task in a country where bus drivers can get state-paid wages of 50,000 euros and some retirees earned more than they did when they worked.

“People need to understand not just how to finance the debt, but how to finance a cultural change,” said Zoulas.

Desperate Times

In Athens, homeless people sleep overnight in central Syntagma Square, the venue for the protests in front of parliament, amid the trees festooned with Christmas lights. Illegal immigrants with shopping trolleys roam the streets of central Athens salvaging disused water heaters, DVD players and other items left on the sidewalks of the city.

Zoulas said he tailored his business to what Greece must become rather than what it was.

After riots greeted former Prime Minister George Papandreou’s struggle in June to impose austerity to gain EU funds, Zoulas and his two partners spent 45,000 euros of their savings to open their restaurant, Kalamaki, named for the slivers of meat grilled on skewers that it sells.

Skirting banks who wouldn’t lend them seed-money, and picking up a lease 30 percent lower than the previous tenant’s, Kalamaki now provides 12 young Greeks with jobs, selling traditional servings of chicken and pork in a restaurant, though at fast-food prices.

Price Crisis

“We don’t call it crisis prices, we call it adjustment,” Zoulas said in the restaurant in the Athens neighborhood of Koukaki, near the Acropolis. “You go for 100 euros a day instead of 10,000 euros a week.”

Zoulas’s wife, an employee in the Justice Ministry, has seen her income drop by about 33 percent as the government reduces allowances, he said.

Civil servants had an additional 20 percent wage cut this year, on top of the 15 percent already mandated under the May 2010 agreement with the EU and IMF for emergency money.

In September, the tax-free threshold was lowered a second time, to 5,000 euros, heralding a higher bill for all. The owners of 5 million homes and stores will pay a special tax on their properties before the end of the year after Finance Minister Evangelos Venizelos declared in September that tax collection efforts were failing.

‘Vampire State’

“The Greek state doesn’t serve, protect or build ethical rules,” Zoulas said. “It’s only function is to absorb revenues. You have to deal with a vampire state. You can’t take a stake to the heart because you need to find the heart.”

Consumer confidence fell in October to the lowest level since March 2009 as international lenders withheld funds to extract commitments from a government struggling to implement what it promised. Cash held at domestic banks by consumers and businesses has declined 33.2 billion euros, or 16 percent, since December 2010, figures from the Bank of Greece show.

Banks lost 6.8 billion euros of deposits in October alone, the biggest drop since the country joined the euro. The drain continued in the first 10 days of November as Papandreou proposed and then withdrew his idea for a referendum on the latest aid package agreed with the EU in late October.

Union Threat

Even as Papademos, 64, secured a fragile alliance of three parties after Papandreou fell, unions took up the challenge.

On Nov. 16, union members at Public Power Corp. SA cut electricity to the Health Ministry to protest the new property tax being levied through power bills. Riot police broke up an occupation of the bill-processing unit.

Such events “blacken the image of this country abroad,” said Dimitrokalis, the hotel owner whose company had “a great season” this summer. A return to the drachma, while good for foreign tour operators, would destroy Greek tourism.

“Greece has become a very special situation, a very risky situation it would seem to me,” Thomas Mayer, Deutsche Bank AG’s chief economist, told Bloomberg Television on Dec. 9. “The Greek economy isn’t really responding to the treatment, the Greek political situation is highly uncertain.”

A GPO poll taken this month showed that more than 76 percent of 1,402 people surveyed said Greece must keep the euro “at all costs.” Eighty-nine percent said they suffered a drop in income this year and 81 percent said they expect the situation to worsen in 2012, the poll showed.

Leftist Bloc

Another poll, by Public Issue, backed up the support, with 66 percent saying they had a positive view of the euro.

That survey also showed that Syriza, which opposes Papademos’s government and policies such as state asset sales, had made inroads and the two leftist parties in parliament against EU and IMF involvement in Greece would make up the second-largest group.

The second-biggest party, New Democracy, has given Papademos three months to secure funds before national elections are held. Measures include negotiating a debt swap that will cut 100 billion euros off Greece’s burden, without which public borrowings can’t be considered sustainable, according to an IMF report published on Dec. 6.

“The emergence of a stronger leftist bloc in the next parliament could easily result in a more vibrant debate about euro membership,” said Wolfango Piccoli, a London-based analyst at Eurasia Group, which assesses political risks.

In Athens, which accounts for half of the country’s gross domestic product, the sudden decline in fortunes is glaring.

Monster Economy

In Syntagma, the main shopping precinct, yellow taxis are lined up two-deep, waiting for fares from Athenians now reluctant to part with their cash. “No more salvation” is one graffiti slogan daubed on the wall of a foreign bank.

The bleak economic situation “is a monster,” said Education Minister Anna Diamantopoulou, a former European commissioner, in Brussels on Dec. 6. Europe’s policy “has humiliated people. One has to deliver not only rules but also hope and solidarity,” she said.

ICAP Plc, the biggest broker of inter-bank transactions, is preparing for a return of the drachma, the currency last used in 2002, and betting companies such as Paddy Power Plc in Ireland are taking wagers that Greece will readopt the old currency.

As political leaders bickered for three days in Athens in November over who would lead a new government, Zoulas and his employees held their own poll in their empty restaurant.

The result: six in favor of keeping the euro, two against, two didn’t know.

“The issue is we’re going to run out of money, whatever the currency is,” said Zoulas, who calculated that custom at his restaurant fell 30 percent in the days after Papandreou announced the referendum. “There’s still no plan. We’re like junkies waiting for our next hit. We still don’t understand what we have to do to get out of this hole.”

--With assistance from Jonathan Stearns in Brussels. Editors: Rodney Jefferson, Tim Quinson

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net


Later, Baby
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus