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Cypriot crisis brings uncertainty to Greece as well

08 April 2013 / 20:04:16  GRReporter
2485 reads

Victoria Mindova

The last three weeks of the first quarter brought dramatic changes to the Greek economy. This is the conclusion in the report on business development prepared by the Foundation for Economic and Industrial Research (ΙΟΒΕ) for the period from January to March 2013.

The freezing of the Cypriot banking system in the middle of March, while considering the method for its recovery, had inevitably affected Greece. Concerns that the banking crises could spread to the neighbouring country were a decisive factor in reducing the trade in the country.

"People stopped entering the shops when the problem in Cyprus started," a young owner of a shop selling electrical appliances confirms IOBE’s assertion. "Consumers started living frugally. They decided not to spend on anything other than essential items. They did not want to buy even a light bulb. As a result of consumer contraction, many shops were barely able to pay their monthly rent."

The Foundation estimates that the processes in the Greek economy were relatively smooth during the first 10 weeks of this year - the business climate improved, the price of Greek government bonds increased and the trade deficit continued to decline. Making public the investments of some large corporations, such as Cosco and H & P in Piraeus, also gave a positive impetus to the Greek economy. Deposits registered a constant increase during the three months from December to February.

All these positive developments were almost reduced to zero, when Cyprus announced that the only way to rescue the local economy was by reforming the banking system. GRReporter asked the experts, "Could you assess the effect of a possible cut of deposits in Greece in case the current recovery programme fails and all possible means to apply new fiscal consolidation measures have been exhausted?"

Initially, the question caused commotion among the economists of the Foundation. Alexandros Tsakanikas denied that such a scenario could be applied to Greece. He insisted that the Greek banking system had a plan and funds for recapitalization. In his opinion, it is not necessary for Greece to "seek" funds from the deposits of citizens to rescue the economy. However, Tsakanikas did not deny that it was possible for other European countries such as Slovenia, for example, to apply a model similar to that in Cyprus.

Odysseas Kyriakopoulos, head of the Foundation, was more specific in his response, "In Greece, we cannot be sure of anything and we cannot exclude any of the scenarios. Let us take the volume of deposits in proportion to the size of the economy and banks. In the case of Cyprus, deposits are disproportionately high compared to the size of the economy. This had placed Cyprus at a disadvantage, because when you have that much money, you have to find where to invest it. Very often, mistakes are being made as regards where to invest or how. Part of the problem in Greece was that the local banks had made serious investments in Greek government bonds, disproportionately high investments, compared to the size of the economy. The situations in Greece and Cyprus are not exactly identical. So, I do not think that Greece will resort to solutions similar to those in Cyprus."

IOBE’s representatives stress that they are not yet able to strictly specify the short- and medium-term negative effects that the problem of Cypriot banks has posed to Greece. The two countries are closely linked, not only culturally and ethnically, but also in terms of the intensive trade between them. It is expected that exports to Cyprus may decline and that deposits in Greek banks may drop as well.

Despite the expected negative effects, economists from the Foundation stress that Cyprus has a high potential for recovery compared to Greece as it has a very well-educated workforce, a more efficient public sector and a more flexible state structure. In addition, only 10% of Cyprus’ GDP depends on the financial sector and insurance.

Specifically for Greece, the analysts sharply criticize the policies pursued to date. They stress that the government's attention is still focused on how to obtain the next tranche rather than on how to redirect the economy to development. "Unemployment will be overcome only if we can attract new direct investments." Kyriakopoulos stresses that investments have neither nationality nor colour.  Direct private investment will come from neither local nor foreign investors unless business feels that Greece is a really stable country.

The recession in the euro zone and the crisis in Cyprus will inevitably have a negative influence on the development of Greece. It is expected that the negative growth for 2013 may exceed the initially forecasted 4.5%, and reach 5%.

In 2012, low performance indicators of entrepreneurship and marketing were directly related to the feeling of uncertainty that was forming during the talks between the foreign lenders and the government. The Foundation for Economic and Industrial  Research stresses that it is not possible for Greece to use additional fiscal consolidation measures and therefore, the government should try to complete the bank recapitalization as soon as possible in order for the banks to begin providing liquidity for real business. It should also reduce public spending and optimize its operations. The fewer and the more efficient the transactions are between the business and the state, the faster positive growth will return to the country.

Tags: EconomyMarketsIOBEGreeceCyprusCrisis
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