By LANDON THOMAS Jr.
Published: January 23, 2009
ATHENS — “The Italians, the Spaniards, the Greeks, we all have been living in happy land, spending what we did not have,” said George Economou, a Greek shipping magnate, contemplating his country’s economic troubles and others’ from his spacious boardroom. “It was a fantasy world.” For some of the countries on the periphery of the 16-member euro currency zone — Greece, Ireland, Italy, Portugal and Spain — this debt-fired dream of endless consumption has turned into the rudest of nightmares, raising the risk that a euro country may be forced to declare bankruptcy or abandon the currency. The prospect, however unlikely, is a humbling one. The adoption of the euro just a decade ago was meant to pull Europe together economically and politically, ending the sometimes furious battles over who could devalue their currency the fastest and beggar their neighbor. For the Continent, the currency signaled the potential to one day rival the United States. For its poorer countries, winning admission to the euro zone was a point of pride, showing that they had tamed their budget deficits and set their financial houses in order. Now, in the middle of the worst economic downturn since the euro’s birth, a new view is emerging — especially as the creditworthiness of Greece, Spain and Portugal, one after the other, has been downgraded. The view is that the balm of euro membership allowed these countries to gloss over serious economic problems that have now roared to the fore. “Membership is not a panacea for a country’s social and economic problems,” said Simon Tilford, the chief economist at the Center for European Reform in London. “In fact, there has been a huge divergence in competitiveness that shows up in massive trade imbalances,” he said, comparing Greece with the wealthier euro countries. “While Greece may have been insulated from the risk of a currency crisis, there is also the risk of a credit crisis and a collapse of confidence in its solvency.” While sharing a currency with some of the mightiest economies in the world helped Europe’s poorer nations share in the wealth, a boon during boom times, in hard times the rules of membership are keeping them from doing what countries normally do to ride out economic storms, including enormous spending. So Germany, France and the Scandinavian countries are mounting billion-dollar stimulus plans and erecting fences to protect their banks. But the peripheral economies are being left to twist in the market winds. With the need for stimulus to deal with the severe downturn, these countries find themselves caught in an awful policy bind: credit is available, but only at punitive rates; and further borrowing not only breaks with European Commission dictates but raises broader questions about their solvency. Bond and currency speculators have demonstrated that they intend to punish countries with dubious economic prospects, just as they have punished banks. Yields are skyrocketing on the debt of peripheral European economies with growing deficits. The British pound has plummeted because of a lack of confidence in plans to shore up British banks. Few experts expect Greece or the other Mediterranean countries to run out of money or leave the euro. But the widening gap between the interest rate that Greece and larger economies like Germany have to pay to borrow reveals the first cracks in what so far has been a fairly solid fortress Europe. Standard & Poor’s has also downgraded the debt of Spain, another growth stalwart, because of the toll taken by its housing crisis. In Ireland, once the high-growth darling of the European Union, the economy continues to reel from a housing collapse and a defunct banking sector with liabilities that surpass the country’s gross domestic product. As with Greece, bond yields there are diverging from those in Germany. The apparent suicide of a prominent real estate developer, Patrick Rocca, is but the most recent reminder of the fear and shock gripping the country. But Greece’s problems are probably the worst. The country has been an easy target for the vigilantes of the European bond market, and recently it has been shaken by a wave of violent protests. The omnipotent hand of the Greek state produced a public debt of more than 90 percent of Greece’s total economic output. The relentlessly rising demand of its consumers, who were able to put off the day of reckoning because they enjoyed the shelter of the low-inflation euro, has created a current-account deficit of 14 percent of its gross domestic product — estimated to be the highest in Europe. The current account measures the difference between a nation’s exports and imports of all goods and services. Last week, Standard & Poor’s downgraded Greek debt to A—, and the gap between the interest rate it pays on its bonds, versus what richer countries like Germany pay, is nearly 3 percentage points, the widest in the euro zone. Mr. Economou, the Greek shipping company operator, is caught in the crossfire. The stock of his company, DryShips, is down 90 percent; banks in Europe that once clamored for his business no longer do so. "The psychology is shattered,” he said with a rueful smile as he considered the blow to his business and net worth. “I have already cried — now I have dried up.”
While a shock to many Greeks, who had become accustomed to the relatively recent comfort of buoyant economic growth and a strong currency, some others, who lived through the country’s past financial and political crises, say the current shakiness is to be expected.
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“We knew this couldn’t last,” Vassilis Karatzas, a fund manager based in Athens, said as he sipped Greek coffee at an outdoor cafe in the city center. “There is fear about the euro zone, but I don’t think the commission will allow its periphery to go down. United we rise, divided we fall.” Yannis Stournaras, an economist who was a top economic adviser to the previous government of the Panhellenic Socialist Movement, says that after a long period of convergence, the recent Greek divergence from northern Europe is to be expected. Adding to the pressure, surpluses from countries like Germany are no longer being recycled back to Greece and other less prosperous countries. Moreover, Germany, the largest exporter in the world, tends not to encourage its consumers to buy more from the rest of Europe. But Mr. Stournaras scoffed at the prospect of a bankruptcy like those once common in Latin America. Nor did he accept the idea that Greece might leave the euro zone and try to devalue its way back to recovery. “Bankruptcy? No, no, no,” he said with a vigorous shake of his head. “Since the beginning of the 20th century, we have never had problems with our arrears.” But others are not prepared to rule out such an event, though they concede it is highly unlikely. One of the few politicians in Greece who has not shied from addressing these issues is Stefanos Manos, a gregarious former economic minister who in the early 1990s ushered in a drastic, and ultimately successful, privatization program. He has founded a new party and is considering a return to Parliament in the hope of joining a new government that would heed his longstanding message: Greece needs to stop running deficits and address the issue of global competitiveness. “We need money to finance our deficits and I see difficulty in us attracting such funds from abroad,” he said, as he received a string of admirers in the Old World splendor of the Hotel Grande Bretagne in Athens. “I am not sure that this won’t spiral out of control, and that makes me saddened and frustrated.” As for the rest of Europe, particularly its weaker links, he also has doubts. “I don’t think Europe is up to it,” he said. “It expanded too rapidly without fixing its institutions.”
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