Business Information

Assignment: Research Paper on PIGS and BRICS

Purpose: Use of Online Business Information Resources

Greece
Current Situation
A significant and severe economic crisis began shortly after the fall elections of 2009, when a new socialist government led by George Papandreou was put into power over the Greek government. State officials revealed that Greece's budget deficit was at 14 percent of GDP—almost twice what the official Greek government statistics had reported. Two months later, in January 2010, Moody's downgraded Greece's debt to A2, raising the possibility of Greece defaulting on its debt.[i]
The economy of Greece, to put it mildly, has run into some bad times. Datamonitor’s PESTLE Report on Greece, out in August 2010, summarizes a woeful economic situation and predicts it will get worse before it gets better. The Greek government’s budget deficit became a major problem as early as 2007, and has only grown worse since. Public debt as a percentage of GDP is steadily rising and has reached monumental levels, now standing as the second highest in the EU, at over 106% and expected to hit 135% of GDP in 2011.[ii]
Now, in November 2010, the recession in Greece has double dipped and production is off by 20%. Business Monitor predicts that the resultant drop in government revenues will make it even harder to patch the hole in public finances, while elevated inflation is exacerbating erosion in living standards. The combination of dilemmas facing the economy risks fracturing social stability and invokes the view that the government’s default and restructuring will be the ultimate result.
The real costs of Greece's past fiscal extravagance are now becoming painfully clear. Aside from severe cuts to frontline public services, the productive capacity underpinning the economy is eroding and the unemployment bulge is getting bigger. The latest headline GDP figure certainly provides grim reading. The economy contracted by 4.5% year over year during the third quarter of 2010, confirming that the recession has indeed double-dipped and the business cycle is yet to reach its floor. Business Monitor Online’s analysts believe that “spending across the board is likely to have retrenched further” by the time we see 4Q statistics.[iii]
On the social stability front, a wave of failed letter-bombs targeting Angela Merkel, Silvio Berlusconi and Nicolas Sarkozy, as well as a handful of foreign embassies, revived Greek fears that local anarchist groups, who played a big role in last spring's (2010) anti-austerity riots, were preparing a fresh round of violence to coincide with local-government elections in November. After a few arrests, the fears did not subside. On October 25th, Prime Minister Papandreou said that if voters turned away from PASOK (his governing party, the Panhellenic Socialist movement) he might call a snap general election in December, barely a year after winning the previous one. This could undermine Greek efforts to maintain the confidence of financial markets and avoid a forced restructuring of its debt.[iv] So far, that has been avoided.
Still, the Greek government has a long way to go to bring the fiscal house in order and anchor investor confidence. Several revisions to the 2009 fiscal shortfall, with Eurostat recently settling on a figure of 15.4% of GDP, have continued to push an end to the crisis further into the future. According to The Economist, the potential now exists for another five (and potentially more) years of consolidation lying ahead. The PASOK administration has retracted the threat to call an early parliamentary ballot after it secured the most votes in the November local elections. However, analysts point out that the mandate is not overwhelmingly strong, with a barrage of confrontational protests and national strikes likely to continue going forward, which will continue to cripple economic activity and deter investment.
The deepening recession has made matters worse. The accompanying fall in revenues has accentuated the fiscal burden and will require even greater spending cuts (or tax hikes) to patch the hole in public finances. The Economist economic forecasts for Greece still call for a smooth adjustment in the fiscal accounts to a more sustainable level, but it remains to be seen whether the government has the disposition and fortitude to pull it off.[v]
Banking & Finance
The banking and finance business has been hard hit by the financial collapse of the economy. S&P put Greece's BB-plus sovereign rating on "credit watch," with "negative implications", in early December. "We may need a longer-term austerity program to bring the debt down to a more sustainable position," said a senior Athens-based economist.[vi]
Greek Finance Minister George Papaconstantinou said, in late November, the country is likely to get an extension for the repayment of its 110 billion euros ($145.73 billion) assistance package from the European Union and International Monetary Fund. Of course, an extension likely brings with it a higher interest rate. The Greek government hopes to return to a more preferred bond-market borrowing by issuing longer-term paper sometime in 2011. The sought-after extension still has to be approved by other European finance ministers at the next meeting in December, and then ratified by each of the 15 euro-zone countries contributing to Greece's bailout.[vii] So, the reduced costs of financing the government is perhaps still only a hope at this point, and may be fading in light of continued stress on the recovery plans.
Major Greek banks continue to severely feel the impact of the downturn. National Bank of Greece SA, the country’s largest lender by assets, said its nine-month net profit fell 74% on sharply higher provisions for bad loans but otherwise met market expectations. "Despite the exceptionally adverse economic climate in Greece, the NBG Group continued to generate profits in what is proving to be a very tough year, maintaining strong liquidity and an enhanced capital base while also fortifying its balance sheet with higher provisions," Chief Executive Officer Apostolos Tamvakakis said on November 29. For the nine months to Sept. 30, the bank reported that net profit fell to [euro]259 million ($343.1 million) from [euro]1.01 billion in the same period a year ago. Provisions for bad loans totaled [euro]991 million.[viii]
Alpha Bank, Greece’s third-biggest lender, reported its own 72% drop in nine-month net profit, as austerity and recession forced it to ramp up loan-loss provisions and curb lending, a Reuters poll found. Analysts had net profit, on average, at 97.8 mln euros, with estimates in a wide 68.5-135.5 mln range. Alpha Bank also has operations in Albania, Bulgaria, Cyprus, Romania and Serbia. Its shares are down 56% this year, underperforming the broader Greek market's 41% decline. The stock trades at about 34 times estimated 2010 earnings, versus a ratio of 12.5 for European peers.[ix] These two examples are representative of the severe blow to banking institutions in Greece.
The euro was hit hard in the first five months of 2010, as a result of investor concerns over the implications of rapid rises in government deficits and debt levels, particularly in what are seen as vulnerable economies (Greece, Ireland and Spain, to name three). The euro has since strengthened significantly. This probably reflects in part the rescue facilities made available in May by countries in the euro area and the IMF to help fund the borrowing needs of Greece and other troubled countries (in particular Ireland and Spain). The United States Treasury Department’s actions leading to a weakening dollar also contributed to strengthening the euro. Fundamental public finance problems remain, alongside weak growth prospects, in Greece. Analysts expect the euro to come under moderate renewed downward pressure from late 2010 and to fall to US$1.19:[euro]1 in 2011, from US$1.30:[euro]1 in 2010. A further fall to US$1.15:[euro]1 is predicted in 2012 and US$1.14-15:[euro]1 in 2013-15. There remain risks of unforeseen movements in either direction, according to the EIU ViewWire.[x]
Civil Unrest, Recession and Unemployment
Greece’s civil servants staged a 24-hour strike nationwide in October to protest against the austerity measures designed to restore fiscal sustainability and economic competitiveness in the country’s debt-laden condition. The strike resulted in some government and tax offices being closed while public hospitals and ministries worked with emergency staff. Many flights to and from Greek airports were cancelled as air traffic controllers joined the civil servants' strike for four hours.
Officials from ADEDY, the umbrella union organizing the strike, estimated that more than 65 per cent of the country's 380,000 civil servants participated in the work stoppage, which culminated in a peaceful demonstration in central Athens. The number of civil servants in the country is about 770,000 including police and military personnel. The turnout was lower than in previous rallies earlier in the year, which is indicative of the prevailing mood as many civil servants have realized that their demonstrations have not been able to effect change.
Spyros Papaspyros, head of ADEDY, told the Financial Times, "The allocation of the government's austerity measures continues to be against the salaried workers and pensioners," adding wage cuts lead to less consumption spending and a deeper recession. The economy is projected to contract about 4 per cent in 2010 and 2.6 per cent in 2011, making it the worst recession in decades.
Civil servants have taken a 15 per cent pay cut on average because of the measures aiming to slash the budget deficit to 8.1-7.8 per cent of GDP this year from the 15.4% (latest Eurostat revision) in 2009. However, most of them enjoy guaranteed jobs for life unlike counterparts in the private sector. Unemployment is projected to rise to 14.5 per cent in 2011 from more than 11 per cent in 2010.[xi]
Inflation
Greek inflation continues to outpace the eurozone and has even surpassed the 2008 inflationary spike, which materialized against the backdrop of triple-digit oil prices. Given that lower prices are required to restore Greece's international competitiveness, stubbornly high inflation is thwarting the internal devaluation process, as well as potentially stirring social tensions by eroding household purchasing power.
In stark contrast to the Irish economy which has endured nearly two years of deflation during its joint fiscal consolidation and internal devaluation exercise, the similarly troubled Greek economy is continually beset by elevated inflation. Consumer price growth has long outpaced the eurozone average, underscoring the protracted erosion of Greece's international competitiveness in the region. The most recent inflationary spike could not come at a worse time given the pressure to force down prices in general, and wages in particular.
Provisions of the EU-led bailout package have required the PASOK government to institute tax increases. Sales tax and excise taxes increases have combined with other factors leading to a significant jump in the country’s inflation rate in 2010. According to the latest data provided by the Hellenic Statistical Authority, headline inflation came in at 5.2% year over year in October, which although down from the previous peak of 5.6% in September, is nonetheless above the eurozone (1.9%) and exceeds the 3.0% average of the last decade. Inflationary pressures have stemmed largely from the transport component, which has recorded a staggering double-digit growth in prices since February 2010. Underpinning the surge in transport costs has been the increase in fuel prices, which are up 36% since the end of 2009. Indeed, the transport component has reversed from being a drag on headline inflation through much of 2009 following the collapse of the global oil bubble, to accounting for nearly a half of the recent uptick in consumer prices. Given that the recovery in oil prices through 2009 and 2010 has moderated significantly, higher base effects should help rein in transport costs in Greece during 2011. Even so, it remains unclear whether the “pass along” from higher oil prices will impact on the cost of manufactured goods.[xii]
The recent two month’s blip of a declining rate of inflation is not expected to be long-lasting. "The softening in the year over year PPI rate is positive but underlying pressures remain high. We expect a more pronounced deceleration in domestic producer and consumer prices in the second half of 2011, on waning base effects and a negative output gap," said economist Platon Monokroussos at EFG Eurobank.[xiii]
Impact on other Eurozone Countries
Across most of Western Europe the recovery in spending has so far been relatively weak. Although the risks associated with the eurozone debt crisis have receded since ratings were last published by the Greek Food & Drink Report, unemployment is still lurking close to a 12-year high and consumer confidence remains generally low. The inflexible nature of the labor market means continued downward pressure on consumption. Analysts are expecting stagnation across the region in 2010 and then very modest growth in 2011. However, with the full impact of the fiscal cuts still to be felt there are downwards risks still in play which may prove fatal for this optimistic 2011 outlook. In terms of risk the region scores well above the global average – a consequence of the developed nature of the markets involved. It is also notable that three of the so called PIGS - Ireland, Italy, Greece and Spain – all score well below the regional average, reflecting the continued risk posed by these countries’ significant economic and political issues.[xiv]
More specifically, Moody's Investors Service recently reported in a new Banking System Outlook that the outlook for the Cypriot banking system is negative, reflecting the challenging operating conditions and the rated banks' direct and sizeable exposure to the Greek economy.[xv] This exposure surely extends to other neighbors who trade significantly with Greece.
Reaction in Great Britain and the United States
In reaction to news reports on the Greek debt crisis, US and Eurozone stock markets took deep hits to overall value in their indexes. UPI reported a sharp downturn for stocks in Asia and Europe for fears of Greece defaulting on its debt, which outcome could severely weaken the euro. Specifically, the S&P 500 index dropped 2.38% and Nasdaq nearly lost 3% in the trading session on May 4, 2010. The Dow Jones average lost more than 2% in the day’s trading session.[xvi]
The fearful reaction of investor’s in general spread across Europe as well. On that same date, in trading in Europe, the FTSE 100 index in Britain lost 0.27 percent, while the DAX 30 in Germany slid 0.19 percent. The CAC 40 in France fell 0.37 percent, while the pan-European DJ Stoxx 50 rose 0.06 percent.[xvii]
In more recent months, markets have stabilized as the Greek government has found willing lenders to shore up their debt conditions, as reported above. The US Treasury action to allow the dollar to weaken certainly had a strengthening effect on the euro. German and French leaders along with the European Central Bank have indicated a no-holds barred approach to salvaging the European debt crisis that has afflicted Greece, Ireland, Spain and Portugal. But, some analysts are saying this is only a forestalling of the next phase and no one should feel that the crisis is solved or even close to being over.[xviii]
Governments and finance leaders continue to watch closely and carefully for signs that the fixes are coming undone so that they can react quickly to restore stability when things break again.
Connection to BRICI (Russia)
In 2008, Greece and Russia celebrated 180 years of diplomatic relations. Websites from both countries foreign ministries called relations between the countries excellent.[xix] Early in 2010, Prime Minister Papandreou visited the Russian Federation to hold talks with Russian President Medvedev and Prime Minister Putin. Mr. Papandreou expressed a desire to strengthen relations with Russia and Mr. Putin acknowledged Greece’s debt crisis but optimistically stated that the crisis would be overcome.[xx]
Leaders from both countries indicated that the debt crisis would have no negative bearing on the joint Burgas-Alexandropolis gas pipeline project. This is the major joint effort between the two countries (with several other partners) to build a pipeline that will deliver more Russian oil (although the article calls it a gas pipeline) to Europe through a southern route, avoiding the route across the Ukraine. Mr. Putin indicated that the pipeline project is focused on post-crisis growth for the region.[xxi]
(Interestingly, the pipeline is, in some news stories, referred to as a gas pipeline for delivering natural gas, whereas in others, it is clearly an oil pipeline intended to reduce the number of Russian oil tankers that sail through the Bosporous and Dardanelles.) Another Russian motivation seems to be Russia’s intentions to avoid and arrangements that might benefit Ukraine. Greece seems only too willing to assist the Russians. Needing a major construction project to employ Greek laborers seems motivation enough, but the long-term revenue stream from the pipeline is no doubt also at play.[xxii]
Imports to Greece from Russia in 2009 amounted to $3.4 billion for all classifications, whereas Greek exports into Russia in the same year amounted to just $342 million.[xxiii]
Perhaps, it is easier to explain how disconnected these two countries and why. Neither country ranks in the top 75 countries of the world for trade across borders. Tables from Eruomonitor country reports bear this out. For example, this comparison of Table 3 from the business environment report for each country. The first is a comparison of Western Europe countries and the second shows Eastern Europe countries.[xxiv]
Table 3: Trading across borders global ranking 2010

Tables not available on blogsite.
Source: Doing Business 2010, World BankNote: (1) Data covers period June 2008 – May 2009. (2) Rankings are based on data sets across 183 countries.

Russia is ranked 182 and Greece 80 out of 183 countries for the value of trade across borders. Beyond the Burgas-Alexandropolis pipeline project there is an apparent lack of relationship through commerce and commodities trading between Russia and Greece. As stated previously, Mr. Papandreou is eager to establish stronger relations with his Russian counterparts.
This condition may be about to change as Russia’s Mr. Medvedev has finally reached agreement from representatives from the European Union for their support of Russia’s entrance into the World Trade Organization, after 17 years of negotiations. This follows the United States’ support of the action in October. Mr. Medvedev called 2010 “the most successful year” in his countries efforts on joining the WTO.[xxv]
In 2011, we shall see if Greece is able to stabilize its economy and to just how great an effect the austerity programs will be on the budget and debt challenges the government faces. In the coming decade, as the Burgas-Alexandropolis pipeline is complete and oil begins to flow, we will observe the changes in relations between Greece and Russia. It will be interesting to see to what extent the socialist leader Papandreou pursues extending trade with Russia and whether or not Russia can become a stronger trade partner with Greece and the rest of the world with membership in the World Trade Organization.

[i] Matthew Bandyk. How Greece’s Debt Crisis Affects America. March 11, 2010. US News & World Report Website. Retrieved December 5, 2010, from money.usnews.com/. http://money.usnews.com/money/business-economy/articles/2010/03/11/how-greeces-debt-crisis-affects-america.html
[ii] Country Analysis Report: Greece. In-Depth PESTLE Insights (Political, economic, social, technological, legal and environmental structure). Datamonitor, August 2010. Retrieved December 5, 2010, from Marketline .
[iii] Capacity erosion will rock economic stability.(2010, November 25). Business Monitor Online. Retrieved December 5, 2010, from LexusNexus.
[iv] Europe: Pasok and its discontents; Greece's economic troubles. (2010, November). The Economist, 397(8707), 64. Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2181151241).
[v] Ibid.
[vi] Kerin Hope. (2010, December 4). Greece hits out at credit rating agency after warning of possible sovereign debt downgrade. Financial Times,3. Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2204366341).
[vii] Nick Skrekas. (2010, November 30). World News: Greece Seeks Grace On Its Repayment. Wall Street Journal (Eastern Edition), p. A.8. Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2200361181).
[viii] National Bank of Greece's Profit Falls 74%. (2010, November 29). Wall Street Journal (Online). Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2199920071).
[ix] GREECE: Alpha Bank 9-month net profit seen down 72%. (2010, November 19). Financial Mirror. Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2194030601).
[x] Greece: Currency forecast. (2010, November). EIU ViewsWire. Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2201027811).
[xi] Dimitris Kontogiannis. (2010, October). Civil servants strike in Greece. FT.com. Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2157119821).
[xii] Inflation shock will subside. (2010, December 1). Business Monitor Online. Retrieved December 5, 2010, from LexusNexus.
[xiii] Greece October PPI inflation slows to 5.0% y/y. (2010, November 29). Financial Mirror. Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2201082021).
[xiv] Greece Food & Drink Report - Q1 2011. (2011, January). Greece Food & Drink Report,1-77. Retrieved December 5, 2010, from ABI/INFORM Trade & Industry. (Document ID: 2192394161).
[xv] Cyprus banking outlook remains negative due to exposure to Greece. (2010, October 28). Financial Mirror. Retrieved December 5, 2010, from ABI/INFORM Complete. (Document ID: 2180187901).
[xvi] Anthony Hall. Economic Outlook: Greek Tragedy. PI.com (2010) May 5, 2010. Retrieved December 5, 2010 from http://www.upi.com/Business_News/Analysis/2010/05/05/Economic-Outlook-Greek-tragedy/UPI-57651273060517/
[xvii] Ibid.
[xviii] Rick Newman. How Europe’s Debt Crisis Could Infect America. December 2, 2010. U.S. News & World Report Website. Retrieved December 5, 2010, from money.usnews.com/. http://money.usnews.com/money/blogs/flowchart/2010/12/02/how-europes-debt-crisis-could-infect-america.html
[xx] Greek PM Seeks to boost ties with Russia. People’s Daily Online. February 17, 2010. Retrieved December 8, 2010, from http://english.peopledaily.com.cn/90001/90777/90853/6895697.html.
[xxi] Ibid.
[xxii] COMPANIES & MARKETS; Russia, Greece plan meeting before year-end on Burgas-Alexandroupolis. (25 October). Interfax : Russia & CIS Business & Financial Daily. Retrieved December 10, 2010, from ABI/INFORM Complete. (Document ID: 2172720391).
[xxiii] United Nations Commodity Trade Statistics Database (UN Comtrade). Data retrieved December 8, 2010.
[xxiv]Passport Reference and Markets. Passport Database, accessed December 8, 2010 through Business & Economics Library at UIUC. http://www.portal.euromonitor.com/Portal/DocumentView.aspx
[xxv] Russia is ‘preoccupied’ by the Euro Debt Crisis. Agence-France Presse, December 7, 2010. Retrieved December 8, 2010, from ISI Emerging Markets database.
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