Greek Economy and Local Business Seeking for Solutions - The Best from Greece
Posted on: 03/Nov/2009
Money flow to companies may make sense if coupled with investment
The capacity of the Greek economy to grow next year will depend, among other things, on the ability of tens of thousands of companies to restructure their business, the willingness and capacity of banks to help them in that endeavor and the stimulation of private investment spending. The odds are not in favor of the optimists but this can change.
According to most analysts, the Greek economy will stagnate next year or advance by about 1 percent at best after contracting by 1.5 percent in 2009. This is a worrisome forecast because it is going to expose even more the weaknesses of thousands of small and medium-size firms which make up the backbone of the Greek economy.
It is generally accepted that many local corporations are in intensive care, awaiting something close to a miracle to survive. Cash flow may be the oxygen in this case but this will not help if vital organs of the body are unable to function. In other words, if sales do not pick up and/or operating costs are not adjusted accordingly.
Greek politicians, commentators and business representatives have long argued that pumping liquidity into small and medium-size companies, mainly via bank loans, is necessary for them to survive at this difficult juncture. This may be because they have little to suggest about how to boost the economy at a time that fiscal policy is very expansive as demonstrated by the large budget deficit, amounting to about 12.5 percent of GDP, which must be curbed.
This does not mean they are wrong in suggesting that Greek credit expansion should pick up. After all, consumption spending is positively linked to consumer loan and credit card growth. Moreover, liquidity is important for companies that are viable based on private financial criteria.
However, injecting liquidity into firms that appear to have little future is tantamount to a misallocation of resources. In such a case, the shareholders and depositors of banks will be called upon to carry the burden. If the loans are guaranteed by the state, taxpayers will be called upon to foot the bill.
Another solution would have been to bail out these companies but this is inconceivable for many reasons, including the objections of the European Commission and the limits of Greek state borrowing and debt.
Under these circumstances, the options to help companies ride out this economic storm are not many.
First, companies will have to realize themselves that liquidity alone will not suffice in a stagnant economic environment and therefore take steps to overhaul their business. This means they will have to seek outside assistance in the event they are unable to help themselves.
Banks that have provided loans to them could be a good choice, since they have a lot to lose if the firms go under. However, there is a real shortage in terms of local investment bankers who have the necessary managerial, accounting, law and lending knowledge to do the job. And doing the job means identifying potential opportunities and preparing business plans before the problem surfaces, or taking over and guiding the firm once the problem becomes evident.
Some senior bankers say there are no more than 20 qualified individuals in the entire Greek banking sector who can do this job, although others claim there are many more. Of course, this has nothing to do with refinancing a loan and extending the maturity of payments, like all banks have been doing for quite some time.
Second, the state will have to honor its commitment and pay off its creditors. Many construction, pharmaceutical companies and others are on the verge of collapse because the state has not paid them for services and projects delivered years ago. There are also other companies, for example in telecommunications, which are cash-starved because they have yet to be paid subsidies from the state for past investments. So, it is important that the state borrows the necessary funds, estimated at about 12 billion euros, to help all these companies survive.
The third option, though not the least important, is for the state to facilitate private investment. One area of interest is the direct conversion of solar energy into electricity. There are more than 1,200 applications pending for such projects, amounting to an investment of 450-500 million euros in Crete alone, plus many others throughout the country. The state could have facilitated the bureaucratic process so that new investments involving billions of euros could be implemented.
All-in-all, it will not be easy for many Greek firms to survive if economic stagnation sets in next year. However, it will be much easier for viable companies to survive if in addition to liquidity, certain investments were facilitated.
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