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greece­2014

FT SPECIAL REPORT

GreeceMonday July 7 2014 www.ft.com/reports | @ftreports

The signs of economic crisisare visible everywhere inAthens, from shuttered shopsand graffiti-sprayed publicbuildings to people of all

ages ransacking dustbins in wealthierneighbourhoods of the capital.

Six years of recession, the deepestin memory, have taken a heavy tollon Greece.

The country’s output shrank byalmost 25 per cent, as tens of thou-sands of family-owned businesses col-lapsed, while pensioners and theunemployed suffered a disastrous fallin living standards amid deep cuts insocial spending.

With jobs disappearing at anunprecedented rate, more than 100,000skilled Greeks migrated to work inGermany, the UK and the Gulf states,knowing that it may be years beforethey can resume careers at home.

The crisis also pushed desperateGreeks into voting for insurgent yetbackward-looking parties, Syriza onthe far left and the neo-Nazi GoldenDawn on the right. Both support areturn to statist policies that triggeredfinancial collapse and the threat of a“Grexit” – Greek exit – from the euro.

Yet there are signs that wrenchingreforms imposed in return for the cur-rent €172bn bailout by the EU and theInternational Monetary Fund arefinally starting to bear fruit.

Growth is set to turn positive thisyear and accelerate in 2015, driven bya boom in tourism, the revival of EU-backed infrastructure projects stalled

by disputes with contractors, and theincreasing availability of loans fromnewly recapitalised banks.

Greece’s successful return to inter-national capital markets in April hasboosted confidence in the country’smedium-term prospects, encouraginghedge funds and private equity groupsto take a closer look at Greek compa-nies that have survived the crisis.

Budget figures for the first fivemonths show revenues on track to hitthis year’s target of a primary surplus

of 1.5 per cent of national output,before interest payments. This sug-gests that improvements in tax collec-tion are being maintained, eventhough a small group of politically-connected Greeks are still able toavoid paying their full tax obligations.

These developments contribute tothe narrative of a Greek “successstory” being promoted by prime min-ister Antonis Samaras and his govern-ment. However, more hurdles must beovercome before Greece can claim to

be heading for a sustained recovery.The first is the European Central

Bank’s stress testing of eurozonebanks this year, which is expected togive an accurate picture of Greeklenders’ non-performing loan portfo-lios, settle a long-running debateabout the banks’ recapitalisationneeds and lead to writedowns of baddebt on a scale that will prevent“zombie” companies from drainingfunds needed for healthy businessesto grow.

Then come long-awaited negotia-tions with the EU and IMF on debtrelief. These are made more compli-cated by differences over whetherGreece should be offered another debt“haircut” on top of its 2012 sovereigndebt restructuring as the Fund wouldprefer, or settle for the commission’sproposal of a lower interest rate and alengthening of maturities.

“We will be in a room with twoelephants and we’ll have to tiptoebetween them in order to come awaywith an agreement,” says a seniorGreek official. “But what matters is toreduce the debt burden for the nextgeneration by one means or another.”

A third worry for Mr Samaras is theelection by parliament next Februaryof a new president to replace theincumbent Karolos Papoulias, who isretiring.

If parliament fails to elect a presi-dent with the required three-fifthsmajority, a general election must beheld, which pollsters already forecastwould lead to the formation ofanother coalition government. Thiswould delay the completion of struc-tural reforms aimed at boosting com-petition and making Greece moreattractive to investors.

Still to be addressed is the politi-cally sensitive question of a new aidpackage for Greece after the currentEU programme runs out at the end ofthis year, even though the IMF is todisburse another €16bn over the next18 months.

The “troika” of officials from thecommission, the IMF and the Euro-pean Central Bank have identified alooming funding gap of some €12bn,yet Greek finance ministry officialsclaim it is smaller and can be pluggedthrough careful management of thepublic finances and judicious borrow-ing on international capital markets.

Continued on Page 3

Signs of revival after years of painConfidence is slowlyreturning but hurdlesstill loom ahead,writes Kerin Hope

Cup that cheers: fans at the Fifa World Cup in Brazil, where Greece reached the last 16 for the first time AP

On FT.com »

2 ★ FINANCIAL TIMES MONDAY JULY 7 2014

In just a few hours one dayin early April, Greece dem-onstrated just how muchthe tide of global investorsentiment had turned in itsfavour.

The country’s first forayinto global capital marketsin four years saw about€20bn of orders for €3bn offive-year government bondsflood into the banks organ-ising the deal. This enabledGreece to borrow at a muchlower cost than had beenexpected – the bonds werepriced to yield just 4.95 percent.

The contrast with themood at the height of thecountry’s crisis couldhardly have been greater.

When Greece’s debt woeserupted into a eurozone-wide threat, the cost atwhich investors were pre-pared to lend to its govern-ment soared – in effectdenying it access to capitalmarkets.

On five-year bonds, yields– which move inverselywith prices – had reached14.5 per cent by May 2010.Greece’s future in the euro-zone was in doubt; its econ-omy came close to collapse.

This year, Greece hascome back from the near-dead. “Markets appreciatethe impressive turnroundstory that Greece has real-ised so far,” says SteliosPapadopoulos, director-general of the Public DebtManagement Agency. “Oneneeds to seize the momentand take advantage ofopportune market trends.”

It is not just the govern-ment that has raised fundsin debt markets. Greekbanks have taken advan-tage of the change in senti-ment to strengthen balancesheets, raising funds morecheaply than would havebeen thought possible a fewyears ago.

The success of April’sdebt auction did not meaninvestors thought Greece’scrisis was over. Manyremain wary of structuralweaknesses even in basicareas such as collectingtaxes as well as the coun-try’s high debt levels. Pub-lic sector debt will be equiv-alent to almost 180 per centof gross domestic productthis year, according to theEuropean Commission.

“Greece’s debt stock isway too large, given its ina-bility [to conduct] effectivetaxation and given itsgrowth dynamic,” warnsMichael Hasenstab, globalbond portfolio manager atFranklin Templeton.

He bought Irish govern-ment bonds and hasinvested heavily in Ukraine.Yet he warned in a Finan-cial Times interview lastmonth: “The underlyingfundamentals don’t justifyan investment in Greece.”

Two factors have thisyear worked in Greece’sfavour, however. First, hasbeen the global “hunt foryield”. Historically low offi-cial interest rates globallyhave sent internationalinvestors searching for risk-ier assets offering higherreturns. For some at least,Greece fitted the bill.

Second, evidence hasmounted that Greece’s for-tunes have changed. “Wehave reached an inflectionpoint,” says George Sarave-los, a Deutsche Bank strate-gist. “The big problem overthe past three years wasthat we could not see thelight at the end of the tun-nel in terms of stability.

“But at the end of lastyear, things stopped gettingworse. It changed percep-tions.”

Greece has reduced itscurrent account deficit andis running a budget surplusbefore interest payments.Moreover, the internationalhelp it has received since2010 means its debt-to-GDPratios are less relevant toinvestors looking over, say,the next three to five years.Greece’s average debt matu-rity is exceptionally long –more than 17 years – andmay be extended further.

The government’s returnto debt issuance has morethan symbolic importance.Structural reforms are moreefficient when access tocapital markets is main-tained, argues Mr Papa-dopoulos.

The debt agency’s strate-gic goal is to recreate theGreek bond market’s “yieldcurve” – offering a range ofbonds of different maturi-ties in order to increase itsattractiveness to a range ofinvestors. “To attract for-eign direct investment andpromote growth in the cur-rent environment, restoringproper access to marketsfor both the sovereign and

banks is essential,” MrPapadopoulos says.

Alongside the govern-ment bond issuance was thewave of capital raising bythe country’s banks.

Before April’s sovereignbond launch, Piraeus Bankbecame the first Greekbank to return to the capi-tal markets with a €500mbenchmark bond. A fewweeks afterwards, NationalBank of Greece, the coun-try’s second largest com-mercial lender, borrowed€750m at a lower cost thanthe sovereign.

Big Greek companieshave also increased bondsales. Total Greek debt issu-ance by companies and pub-lic-sector institutions hasexceeded €10bn so far thisyear. This compares withjust €6.4bn for all of 2013 –although it remains wellbelow pre-crisis rates,according to Dealogic data.

The wave of bank capitalraising – in equity as wellas debt markets – has ena-bled Greece to rebuild itsfinancial system after thetraumas of the past fewyears at a much faster pacethan expected.

That could help the coun-try’s turnround, allowingthe banking system to per-form its core function ofproviding finance to theeconomy.

“Greek banks are moreconfident about expandingtheir balance sheets andlending,” says Mr Saravelosat Deutsche Bank.

Cheaper debtmarks changein fortunesCapital markets

After the woes offour years ago,sentiment turns,says Ralph Atkins

‘At the end of lastyear, thingsstopped gettingworse. It changedperceptions’

With the jobless rate amongyoung graduates approach-ing 40 per cent, the incen-tive for skilled Greeks totravel abroad to find workis strong.

Yet several hundredyoung entrepreneurs aretesting their abilities byfounding technology start-ups at home.

Until the crisis struck,Greece had few aspirationsto become an internet hub,even though several univer-

sity IT departments staffedby US-trained professorswho keep up their SiliconValley connections turn outhighly qualified softwareengineers.

Now there is a drive tocatch up.

“The crisis has changedthings in a positive way,”says Marco Veremis, co-founder and chief executiveof Upstream, an Athens-based mobile marketingcompany.

“There’s a start-up cul-ture that’s buoyant. It’s stillearly days, but people areworking to produce some-thing with value-added.”

The bulk of financing fortechnology start-ups comesfrom four venture capitalfunds backed by an EUregional development pack-age covering 70 per cent ofa seed capital investment.

Aristos Doxiadis, a pri-vate equity professional,says: “There have neverbeen many angel investorsin Greece and it was hardto raise funding at theheight of the crisis, butthere’s a community of peo-ple here who trust eachother, so we managed.”

He adds: “Now that sev-eral start-ups have takenoff, there’s growing inter-est.”

Mr Doxiadis is a partnerin Openfund II, a €11moperation that providesGreek technology start-upswith business tools andadvice for competing in aglobal market, from guid-ance on pitching for fund-ing to access to 50 interna-tional mentors. It is backedby the EU’s EuropeanInvestment Fund and adozen private investors.

One early success wasTaxibeat, a smartphoneapplication for hailing cabsthat was launched in 2011.It made headlines in Athensat a time when taxi serviceswere being disrupted bycabbies resisting reforms ofthe transport sector.

Taxibeat differs fromother taxi-hailing apps byenabling customers tochoose the driver they pre-fer, based on ratings byother passengers plusextras such as speaking flu-ent English.

Considered a good fit forEuropean cities with heavytourist traffic and foremerging markets wheretaxi services are less regu-lated, Taxibeat hasexpanded in markets acrossEurope from Bucharest toParis and also in LatinAmerica.

“Taxibeat has played acatalytic role for Greekstart-ups because it wassuch a good story,” Mr Dox-iadis says.

Openfund II has backed12 start-ups since its launchlast year and plans to reach25 by the end of 2015.

So far, only one companyhas reached Silicon Valley.Bugsense, which collectsand analyses crash reportsfrom mobile apps, waslaunched in 2010 with aseed investment of $100,000from a group of Greekdiaspora IT experts workingin California.

It was sold last year toSplunk, a US-based dataanalytics company, for anundisclosed amount.

Workable, founded by twoformer Upstream employ-ees, is tipped as Greece’snext success story after

raising $1.5m in a new fund-ing round led by GreylockPartners, a Silicon Valleyventure capital fund.

Workable is developingcloud-based recruitmentsoftware for small andmedium enterprises.

“When a Greek start-up

raises funding from aninternational fund, it sendsa clear message to investorshere,” says Mr Veremis, anangel investor and boardadviser to Workable.

Several start-ups aimedat the tourist industry, themost important sector of

the economy, have sinceexpanded into global mar-kets.

Incrediblue’s website con-nects yacht-owners andcrew with customers whobook sailing holidays basedon price, location andreviews by users, reducingcosts in a fragmented mar-ket where local brokerscharge high fees.

Locish, a smartphonequestion-and-answer appthat has attracted $820,000of funding from two Greekventure capital funds, pro-vides travellers with tipsfrom local residents onwhere to eat and drink inAthens, New York and SanFrancisco.

Incubators that providebusiness space along with“open coffee” sessions andweekend meetings giveyoung entrepreneurs an

opportunity to exchangeideas and receive feedback,says George Kasselakis,Openfund II’s executivedirector.

Thanos Kosmidis and hispartner Alex Giamas workat Microsoft’s innovationcentre in Athens, whichsupports several start-upswith technology advice andmentoring.

CareAcross, their English-language website support-ing cancer patients and caregivers, which is financedwith €100,000 of privatefunding, is at an early stageof development.

“It’s useful to have aphysical base with a diverseset of people supportingyou,” says Mr Kosmidis,who worked for IT compa-nies abroad for 12 yearsbefore returning to Greeceto start as an entrepreneur.

Crisis forces rethink as entrepreneurs win funds for their ventures

Greece’s economy is stabil-ising after six years ofrecession and will needcredit expansion to achievea sustained revival ofgrowth.

Yet the country’s foursystemically importantbanks, recapitalised withmore than €35bn over thepast year, are taking a cau-tious stance ahead of thisyear’s European CentralBank stress tests.

With one of the world’shighest ratios of non-performing loans, Greekbanks are under pressure todeal with bad loans moreeffectively, while continu-ing to support creditworthycorporations and house-holds.

Yannis Stournaras, thenew central bank governor,

says loans left unservicedfor more than 90 days stoodat €77bn or 36 per cent ofthe total portfolio in April.Senior Greek bankers saythey are expected to peakearly next year.

One of Mr Stournaras’sfirst tasks will be to con-sider whether Greeceshould set up a standalone“bad bank” for systemicbanks’ non-performingloans – which wouldrequire additional funding –or rely on pressing thebanks’ internal restructur-ing units to move faster.

Previous efforts torestructure key sectors thathave a high percentage ofbad loans – among them thehotel, construction and fish-farming industries – havebeen constrained by diffi-culties in persuading banksand company owners to co-operate.

The Greek banks wereinitially recapitalised with€25bn from bailout fundsheld by the Hellenic Finan-cial Stability Fund (HFSF),plus another €3bn raisedprivately.

This year the four bankshave raised another €8.3bnon international capitalmarkets to bolster capitaladequacy ratios, following astress test carried out bythe Bank of Greece togetherwith BlackRock, an invest-ment management com-pany. The fund-raisingshave also allowed banks torepay preference sharesheld by the Greek state.

However, the Interna-tional Monetary Fund saysbanks may need as much as€15bn in extra capital towrite down bad loans moreaggressively. It argues thatan overhang of private debtwill undermine growth ifresources remain trapped inunproductive activities.

Some local analysts dis-agree. Kostas Manolopou-los, head of research atInvestment Bank of Greece,says: “The assumptions inthe Greek central bank’sstress tests were quite con-servative, and banks arealready overcapitalised.”

Politicians and business-people complain the econ-omy is being stifled by a

lack of liquidity, becausebanks are reluctant toextend credit to support arecovery. They point outthat credit to the privatesector has been shrinkingsince 2010, falling another3.7 per cent in April on anannual basis.

Bankers are quick toreject such criticism. Chris

Megalou, chief executive ofAthens-based Eurobank,says: “The credit contrac-tion is mainly a function ofweak demand and strictercredit controls.”

Mr Megalou says an im-proving economic outlookwill drive demand for loans,especially for new invest-ment projects.

Nikos Lianeris, an analyst

at Alpha Bank, says theeffort to transform Greece’sintroverted, consumption-oriented economy into onebased on exports andinvestment has already“left many corporate bor-rowers with business mod-els based on the old para-digm in distress.

“We shouldn’t expect therestructured Greek bankingsector to help revive suchcompanies through liquid-ity injections. The role ofbanks will be to fund ven-tures in extrovert sectorsthat have robust businessmodels,” Mr Lianeris says.

However, the banks’capacity to boost lendingwill also depend on theiraccess to the ECB’s newprogramme of cheap loansknown as “targeted long-term refinancing opera-tions” or TLTRO.

The four-year programme,aimed at investment in non-financial, productive sectorsof the economy, is intendedto benefit small and medi-um-sized enterprises (SMEs)that have been starved ofcredit. The loans will be

offered from September,with banks able to borrowat 0.25 per cent providedthey meet the ECB’s lend-ing target.

Greek banks have lostmore than €79bn of depositssince the crisis erupted in2009, through capital flightand withdrawals of savingsby households hit hard bythe recession. Until theirrecent return to capitalmarkets, the banks reliedheavily on ECB fundingand emergency liquidityassistance from the Greekcentral bank.

Petros Christodoulou,deputy chief executive atNational Bank of Greece,the second-largest commer-cial lender, is cautiousabout TLTRO funding, eventhough it would allowbanks to provide liquidityinjections to SMEs.

He says: “We don’t haveenough information at thispoint about the kind of col-lateral required for TLTROoperations to be able todetermine the amount ofliquidity Greek banks couldlook forward to.”

Credit expansion and loan quality are prioritiesBanks

The ECB stress testsare focusing minds,says DimitrisKontogiannis

Greece is poised to return togrowth this year after thelongest and deepest reces-sion since the second worldwar.

However, more reforms must beimplemented before a sustained recov-ery can take hold.

For the first time since a joint EU-International Monetary Fund pro-gramme veered off track in 2011 – lessthan a year after it was launched –the IMF says it is cautiously optimis-tic about Greece’s prospects, citing an“extraordinary fiscal adjustment” anda successful re-entry to internationalcapital markets.

A double-digit budget deficit wastransformed into a primary surplus(excluding interest payments on debt)in just four years, thanks to draco-nian spending cuts and an unprece-dented drive to boost tax collection.

Finance ministry officials boast thatGreece now has the highest “cyclical-ly-adjusted primary balance” in theeurozone, that is, after taking intoaccount the impact of the businesscycle on revenues.

The economy is forecast to grow by0.4-0.6 per cent this year after sixstraight years of decline, but someanalysts are confident that a recordyear for tourism could lift growthhigher, perhaps to 0.9-1.0 per cent.

There are signs that consumers maygradually be regaining confidence.Private consumption rose 0.7 per centin the first quarter, the first quarterlyincrease in more than four years.

Retail sales were up 7.3 per cent byvolume in April, the strongest rise inmore than two years, as Greekssplashed out for Easter at supermar-kets and clothing stores.

The business confidence index hit asix-year high in June, with banksreporting increased demand for loansfrom companies working in recovery-

oriented sectors such as energy andinfrastructure.

The seasonally adjusted jobless rateis still high at 26.8 per cent, but hasedged down from last September’srecord 27.8 per cent of the workforce.

However, it is unclear whetherGreece can pull off sustained annualgrowth rates of about 3 per cent, thelevel required to increase the primarysurplus to 4.5 per cent of output in2016 – the target set by internationalcreditors – and make a serious dent inthe country’s bloated public debt.

George Pagoulatos, professor ofpolitical economy at Athens univer-sity of business and economics, says:“Growth is the key issue . . . It’s amajor concern whether the rate willbe considerably above the level ofstagnation, whether it’s sustainable,whether companies can make theexport-oriented shift that’s needed.”

Greece has recovered most of the 30per cent drop in competitiveness itsuffered during the first decade ofeuro membership as a result of asteep fall in wages, and reforms thathave opened up the labour market.

Individual contracts and part-timeworking, once effectively banned byunions, have become the rule for newentrants to the workforce. Employers’contributions to IKA, the main socialsecurity fund, have been cut and pen-sions slashed across the board.

“The economy that’s emerging fromthe recession is a very different andmuch healthier animal,” says MichaelMasourakis, chief economist at AlphaBank in Athens. “A 3 per cent annualgrowth rate should be sustainable aswe are starting from a lower base.”

The IMF warns, however, that fur-ther structural reforms “are key forthe incipient recovery that we hope tosee turn this year into a robust, sus-tained recovery over the mediumterm”.

The government has adopted mostof the 550-odd reforms in a “toolkit” ofmeasures prepared by the Paris-basedOrganisation for Economic Co-opera-tion and Development to reduce barri-ers to competition, yet some measureshave been delayed or diluted becauseof pressure from powerful interestgroups.

The 12,000-strong union of pharma-cists, for example, successfullyresisted the abolition of a guaranteedprofit margin on drugs, even thoughit has been cut from 35 per cent to 15per cent.

Objections raised by interestgroups, the judiciary and, in somecases, EU competition regulators, aredeemed responsible for the slow paceof privatisation sales.

A target of raising €50bn by 2025from sales of state-controlled compa-nies, properties and land for develop-ment, has been slashed to €25bn asthe scale of legal and administrativeobstacles became clear.

The Hellenic Asset DevelopmentFund (Taiped), the privatisation

agency, has already cut this year’srevenue target from €3.5bn to €1.5bn.

The target will have to be cut againfollowing a recent judgment againstthe sale of the state’s stake in Eydap,the Athens water utility, issued bythe council of state, Greece’s highestadministrative court.

The council unexpectedly ruled thatwater companies should remain underpublic ownership on grounds that afor-profit private operator could notbe relied on to supply affordable,high-quality services in the publicinterest.

The decision was seen as a blow toattracting large European entities toparticipate in Greek disposals.

Miranda Xafa, chief executive of EFConsulting in Athens and a formerGreek representative to the IMF, says:“People don’t yet have the confidenceto invest here. The main inflows havebeen from hedge funds, so they couldbe reversed very quickly.

“At the moment, nobody is buildingplants or making long-term deci-sions,” she adds.

Concerns lingeron growth asIMF calls forfurther reformsEconomy Business confidence is at a six­yearhigh but more needs to be done to make therecovery sustainable, writes Kerin Hope

‘The banks’ role willbe to fund venturesin extrovert sectorsthat have robustbusiness models’

Shoppers splashout: April’s rise inretail sales wasthe strongest inmore than twoyears Charlie Bibby

‘Theeconomythat isemergingfrom therecession isa . . . muchhealthieranimal’

Greece

Technology start­ups

IT experts are usingthe home market asa springboard forglobal success,writes Kerin Hope

Greece

Sources: Thomson Reuters Datastream; IMF

Real GDP (rebased)

2008 10 12 1475

80

85

90

95

100

Greece

Eurozone

Growth forecasts(annual % change in real GDP)

-4

-2

0

2

4

2013 14 15 16

GreeceGermanyIrelandItalyPortugalSpain

Unemployment rates (%)

2008 10 12 145

10

15

20

25

30Greece

Eurozone

The Taxibeathailing app‘has played acatalytic rolefor Greekstart­ups’

FINANCIAL TIMES MONDAY JULY 7 2014 ★ 3

Despite his government’s doggedexecution of the current programme,Mr Samaras is as keen as AlexisTsipras, the Syriza leader, to tell vot-ers that the unpopular “memoran-dum”, as the bailout is known inGreece, has expired.

While some Greek officials acceptthat a precautionary arrangement ofsome kind will be needed to maintaininvestor confidence and ensure accessto markets, the troika worries thatreform fatigue and the influence ofpowerful vested interest groups couldlead to weaker implementation oreven the reversal of key measures toliberalise domestic markets.

Yet if Athens can hold the line onreforms, Greece’s family-run busi-nesses would have an opportunity torevive the flagging export sector bydeveloping niche markets in foodprocessing, manufacturing and tech-nology, says Mike Efmorfides, co-founder of Coco-Mat, a producer ofluxury mattresses.

“We survived the crisis by focusingon exports and developing more out-lets abroad. For a small Greek com-pany making a high-quality product,it is the only way to go,” he says.

Reforms making it easier for youngentrepreneurs to set up a new busi-ness and hire part-time staff, togetherwith EU-backed funding for small andmedium companies, are making animpact, even though venture capitaland bank financing is still in shortsupply.

“The crisis forced young Greeks tochange their mentality and look for anew model,” says Mareva Grabowski,a former investment banker andfounder of the Greek branch ofEndeavor, a global organisation thatsupports entrepreneurs in emergingmarkets.

“Their attitude to risk is different

Continued from Page 1and they’re willing to try to becomeentrepreneurs,” she adds.

When it comes to large-scale invest-ment, infrastructure projects thattake advantage of Greece’s strategiclocation in southeast Europe are tak-ing priority.

Greece is already involved in theTrans-Adriatic Pipeline (TAP) projectto transport natural gas from theShah Deniz field in the Caspian Sea tocentral Europe. Construction of theGreek segment would provide workfor dozens of small Greek construc-tion companies and more than 1,000jobs across the north of the country,where the unemployment rate exceeds30 per cent of the workforce.

Socar, the Azeri state gas company,has bought Greece’s gas grid operatorDesfa in a privatisation sale and plans

to invest in extending the distributionnetwork to smaller cities across thecountry.

Yet China has emerged as the keen-est potential investor in Greece,described by premier Li Keqiang dur-ing a visit to Athens last month asBeijing’s “gateway to Europe”.

Shortly before the crisis erupted,the Chinese state shipping operatorCosco won a concession to operate acontainer terminal at Piraeus, a suc-cessful investment that has since seenfurther capacity added.

Now Cosco is bidding for the Greekstate’s majority stake in Piraeus portauthority, the port’s owner. OtherChinese companies are interested inacquiring concessions to operate thestate railway company and AthensInternational Airport, the city’s onlyinternational gateway, which willboth be up for privatisation next year.

Signs of revival emergeafter six years of pain

Greece’s first coalition gov-ernment in more than ageneration looked wobblyfrom the moment it tookoffice after a hard fought

election in June 2012.Relations are tense between Antonis

Samaras, prime minister and leader ofthe centre-right New Democracy party(ND) and foreign minister EvangelosVenizelos, head of the PanHellenicSocialist Movement (Pasok), the twoparties that are held jointly responsi-ble by voters for plunging Greece intoeconomic disaster.

Their junior partner, the Demo-cratic Left of Fotis Kouvelis, aleftwing fringe group, pulled out ofthe coalition last year over a unilat-eral decision by Mr Samaras to shutdown – albeit temporarily – the statebroadcaster ERT.

Mr Kouvelis’s departure, along withserial defections by ND and Pasoklawmakers opposed to specific struc-tural measures, has left the govern-ment with a majority of only threeseats, making a cliffhanger out ofevery vote on reforms agreed with the“troika” of international lenders: theEuropean Commission, the EuropeanCentral Bank and the IMF.

Yet the coalition stumbles on, deliv-

ering fewer measures than agreedwith the troika but still enough tosustain regular disbursements of aidfrom the country’s €172bn secondbailout package.

The next few months, however, willbe critical for the government’s sur-vival. It will face renewed pressurefrom the troika to implement meas-ures delayed because of opposition byspecial interest groups, while at thesame time seeking a consensus candi-date for the (mostly ceremonial) postof president of the republic.

With Karolos Papoulias, the 85-year-old incumbent, due to step down nextFebruary, the hunt is on for a person-ality above politics who can win therequired three-fifths majority in par-liament and avert an early generalelection.

“The government could pull this offby persuading a clutch of independentdeputies to back their candidate, if itcan’t find a Greek of internationalstature to try for the job. But noth-ing’s clear-cut,” says Costas Iorda-nides, a veteran Athenian politicalcommentator and columnist.

ND lost the European parliamen-tary elections in May to the far-leftSyriza party of Alexis Tsipras, whocampaigned on a platform of revers-

ing the majority of bailout reforms.Yet Syriza’s win by less than 4 per-

centage points fell short of the marginthat would have signalled the coali-tion’s imminent downfall.

With a combined percentage of 30.73per cent for ND and Pasok, against26.5 per cent for Syriza, the coalitioncould still claim it was backed by amajority of voters, despite an unprece-dented jobless rate and record levelsof taxation in the past two years.

Yet the election underscored theincreasing fragmentation of Greekpolitics, with voters switching to anti-establishment parties, both left andright.

Syriza has attracted many formerPasok supporters still nurturinghopes of a return to the generous pub-lic sector hiring policies of the 1990s,even as the coalition acts to shed jobsin the civil service and privatise state-controlled corporations.

Makis Andronopoulos, an authorand political commentator, says:“Syriza doesn’t have to move to thecentre to have a chance of winningpower . . . It only has to wait. The con-tinuing impact of austerity will bringit many more voters who want tomake a protest.”

To the government’s dismay, former

ND voters have become the backboneof support for the neo-Nazi GoldenDawn party. It has three Europeanparliament deputies after winning 8.9per cent of the vote, even though itsfounder and leader, Nikos Mihalolia-kos, was jailed last year and is await-ing trial on charges of founding andrunning a criminal organisation.

The party spokesman, Ilias Kasidi-aris, insists Golden Dawn is a nation-alist, not a neo-Nazi, party and deniesthat its black-shirted members haveparticipated in violent attacks againstimmigrants. Golden Dawn’s 18 depu-ties in the Greek parliament will allface charges of belonging to a crimi-nal organisation, according to thejudiciary, but it is unclear whetherthe party will be banned.

Then there is To Potami (TheRiver), a pro-reform party founded bya popular television journalist, Stav-ros Theodorakis and backed by mod-erates from the centre-left. To Potamiwon 6.6 per cent of the vote at theEuropean election, only three monthsafter it was launched.

Its programme is still being shapedafter a recent congress, yet its sup-porters are optimistic that Mr Theodo-rakis will become a key player inGreece’s next coalition government.

Coalition facescritical chapterin its fight for lifePolitics European election turmoil emphasisesthe system’s fragmentation, writes Kerin Hope

In the bigger scheme ofGreece’s ordeal byfinancial collapse, it mayseem a modest triumph forgood government that itsministers and financialpolice are finally getting togrips with the timewornscam of welfare cheatsclaiming pensions onbehalf of deceased Greeks.

The perpetrators are asmall minority of Greece’s10.8m people, and the sumsrecovered – about €40m –pale into insignificancenext to the public debt ofabout €320bn, equivalent to175 per cent of annualeconomic output.

Yet the elimination ofpensions fraud, like thesuppression of tax evasion,lies at the core of themodernisation programmeon which Greece embarkedafter its first emergencyinternational financialrescue in May 2010.

It is no exaggeration tosay that if these effortsfalter, because of a failureto refashion parasitical andmistrustful attitudes to thestate that go back to theearly days of independencein the 1830s, the pain andsuffering that Greeksociety has endured overthe past five years will nothave been worthwhile.

For the Greek crisis wasalways about much morethan sky-high sovereignbond yields, excessivebudget deficits, rigidlabour markets and thecartel-like behaviour ofprivate sector businessesand professional cadres.

It was about socialattitudes, respect for thelaw and the need for aproper relationshipbetween the citizen andthe state, a bond strippedof suspicion and cleansedof peculation. It was aboutwhether Greece as a state– rather than Greece as an

economy – was fit to sharethe same currency asGermany.

The nation plunged intocalamity because, longbefore the euro’s creationin 1999, generations ofGreek politicians and thegeneral public hadpreferred to think of thestate not as a disciplined,impartial dispenser of tax-funded public services, butas a pot to be picked cleanby patronage and pilfering.

The wake-up call of 2010,though a shock to the two-party political order thathad ruled and misruledGreece since the collapsein 1974 of a seven-yearmilitary dictatorship, didnot immediately result inimprovements.

Entrenched political,bureaucratic and tradeunion interests provedmasterful at sabotagingchange in the publicsector. As unemploymentraced past 25 per cent ofthe workforce, in the earlyphase of the crisis the

private sector bore thebrunt of the hardship.

Eventually, widespreadsocial distress, the absenceof substantive economicreform and the emergenceof political extremists onthe left and right, coupledwith the fear that Greecemight drop out of the euroor renege on its obligationsto allies and creditors,produced an electionvictory in June 2012 for aconservative-led coalition.

Led by Prime MinisterAntonis Samaras, the newgovernment saw that thesand in the hourglass wasrunning out. A moreconvincing effort at reformwas essential in order tosave the economy, Greece’sinternational standing andperhaps democracy itself.

Two years on, the causeof Greek reform is making

progress but is way shortof comprehensive victoryover the forces of inertiaand old habits. The taxsystem is a case in point.

In the pre-crisis era, aprofusion of tax offices ingeographically remote andtechnologically backwardparts of Greece encouragedtaxpayers to reduce theirbills by doing deals withcorrupt officials. Thestructure of tax collectionwas, in itself, animpediment to change.

Now the authorities haveshut scores of regional taxoffices, bringing strongercentralised control. Andinformation technology hasenabled more monitoringof tax assessments. About2,000 audits a week areconducted at restaurants,shops, doctors’ premisesand other places suspectedof concealing income. Taxrevenue is rising.

The system has not beenstrengthened sufficiently tocapture the biggest andwealthiest tax evaders – apoint made by HarisTheoharis, Greece’s seniortax collection official, whenhe abruptly resigned inearly June, much to thedismay of the nation’sEuropean partners.According to Mr Theoharis,280 investigations of largetaxpayers had collected amere €80m in extrarevenues.

This serves as areminder that the deepestquestion that will faceGreece in the next 12months is not whether itsforeign creditors will agreeto another debt relief dealto shore up its eurozonemembership.

Nor is it whether thetourism industry, soimportant a source offoreign income, will enjoyanother record-beatingseason. It is not evenwhether the Samarasgovernment will fall andthere will have to be anearly election.

Rather, it is whether thepolitical classes, stateemployees, business peopleand the general public willmaintain the wrenchingeffort to place theircountry on an irreversiblepath to modernity.

Reform still way short ofvictory over old habits

OpinionTony Barber

‘If these effortsfalter, the sufferingof the past fiveyears will not havebeen worthwhile’

Kerin HopeAthens Correspondent

Ralph AtkinsCapital Markets Editor

Tony BarberEurope Editor

Dimitris KontogiannisAthens­based journalist

Andrew BaxterCommissioning editor

Claire HollandPicture editor

Steven BirdDesigner

For advertising details,contact: Jim Swarbrick, tel+44 (0)20 7775 6220, emailjim.swarbrick@ft.com; or yourusual FT representative.

Contributors »

Greece

Faces of protest: environmental campaigners outside the Greek parliament,wearing masks of Antonis Samaras (left) and Evangelos Venizelos Getty

€12bn‘Funding gap’ identified by the troika

4 ★ FINANCIAL TIMES MONDAY JULY 7 2014

The Greek crisis put paid to AegeanAirlines’ bold ambitions, pushing theAthens­based regional carrier into thered for three successive years, writesKerin Hope.

Yet the crisis also allowed Aegeanto acquire its ailing rival Olympic Airat a knockdown price.

Aegean, which is controlled by theVassilakis family, the airline’s founder,and several senior Greek shipowners,agreed last year to pay €72m forOlympic after the EuropeanCommission withdrew earlier concernsthat a takeover would result in aquasi­monopoly on many Greekdomestic routes.

Eftichios Vassilakis, Aegean’sexecutive vice­chairman, believes theairline will see the benefits ofconsolidation this year, with domestictraffic reviving and international touristarrivals poised to hit a new record.

“Greece started to recover as atourist destination in late 2012 andthings have been improving eversince,” he says. “We expect therecovery to continue over the comingyears, provided small but importantimprovements take place.”

Aegean turned profitable again in2013, with net earnings of €56.3m onrevenues of €683m. This excludesOlympic’s losses, which were €13.9mlast year on revenues of €168m.

Aegean is operating from eightbases around Greece this summer,offering 14 new routes, among themthree regional cities in Germany andthree Middle East destinations, inaddition to seasonal flights toManchester and the south of France.

With a market share of less than20 per cent of international traffic toGreece, the consolidated airline hasplenty of room to grow.

“Our plan is to double our routesout of Athens by 2017, expanding ourreach and supporting Greek tourism,”says Mr Vassilakis.

An expanded version of this article isavailable at www.ft.com/greece­2014

Profile Expansion backon flight plan at Aegean Air

Greece

Greece is enjoying a recordyear for tourism, with pop-ular resorts booked tocapacity in July andAugust and international

cruise ships queueing up to call atAegean Island ports.

Visitor numbers jumped by 30 percent to 1.9m in the first four monthsof 2014 compared with last year,according to SETE, an association ofGreek high-end hoteliers and touroperators. Athens saw a 36 per centrise in arrivals, while the AegeanIslands notched up a 120 per centincrease, thanks to a surge of visitorsover the Easter holidays.

Andreas Andreadis, SETE’s presi-dent, forecasts that Greece will attractmore than 19m visitors this year,beating last year’s record of 17.9m.

A recovery in traditional marketssuch as the UK and Germany isexpected to offset a sharp fall in arriv-als from Russia, Ukraine and the Bal-kan countries.

Another 2.2m visitors are expectedto arrive on cruise ships, which com-pete in high season for a slot to disem-bark passengers for a stay of a fewhours on the islands of Corfu, San-torini and Mykonos.

“I’m very bullish about the tourismindustry, I think it will help lift [GDP]growth this year closer to 1 per centcompared with the official projectionof 0.4 per cent,” Mr Andreadis says.

Revenues from tourism, Greece’slargest foreign exchange earner, areprojected to reach €13.5bn this year,

up from €12bn in 2013. Mr Andreadisexpects spending per head to show amodest increase from €650 to €700.

“Greece is on a par for visitorspending with Italy and Spain, and abit higher than Turkey,” he says.

There is still plenty of room forGreece’s tourist industry to expandand move upmarket, however.

A study by McKinsey, the consul-tancy, suggests that arrivals couldreach 21m by 2024 with annual reve-nue increasing to €18bn (in today’smoney), provided Greece maintainspolitical stability and manages toattract substantial private investmentin the tourism sector.

The “shoulder” season in spring andautumn is still under-developed.Greece lacks high-end integratedresorts, while few luxury hotel brands

are present. Golf courses, whichattract high-spending tourists, are inshort supply.

In spite of having the EU’s longestcoastline and almost 200 inhabitedislands, only a handful of Greek mari-nas offer the same standards of serv-ice as found in Croatia and Turkey,the country’s main rivals for yachtingtourism.

So far, only a few internationalfunds and tourism operators haveacquired hotels in Greece or haveteamed up with local partners withexpertise in hotel management.

One prime Athens property, theAstir hotel at Vouliagmeni south ofthe capital, was sold last year to Jer-myn Real Estate, a fund backed byinvestors from Abu Dhabi, Kuwaitand Turkey in a deal managed by the

Hellenic Republic Asset DevelopmentFund (Taiped), the country’s privati-sation agency. The transaction valuedthe Astir property, consisting of threehotels and a marina on a secludedpeninsula overlooking the SaronicGulf, at €440m, the highest price paidto date for a Greek hotel.

Oaktree Capital Management, a USinvestment fund, has teamed up withSani, Mr Andreadis’s family-ownedhotel company, to create a luxuryresort group that plans to invest morethan €100m in acquiring and upgrad-ing existing hotels around Greece.

The partnership has alreadyacquired two properties in Halkidiki,a northern Greek resort area popularwith Russian visitors. It is consideringanother purchase in Messenia, wherethe Greek-owned luxury resort Costa

Navarino is setting the pace for high-end tourist development.

Greece’s biggest privatisationproject, the €6bn development of theformer Athens International Airportsite at Hellenikon into a tourism andleisure hub for the east Mediterra-nean, is finally taking off. Developerswarn that it may take 25 years tocomplete the project: the 640-hectarecoastal site is bigger than the princi-pality of Monaco.

An investor group led by Latsis, aGreek family group, in partnershipwith the Chinese conglomerate Fosunand Al Maabar, a property companylinked to Abu Dhabi’s sovereignwealth fund, agreed to pay €915m fora 99-year-lease on Hellenikon.

Hellenikon has an acclaimed airportterminal designed by Eero Saarinen,the Finnish-American architect, buthas lain abandoned since hosting ahandful of events at the 2004 summerOlympics. A plan being prepared byFoster & Partners, the UK-basedarchitectural company, provides for a200-hectare metropolitan park, morethan doubling green space in thegreater Athens area.

Meanwhile, Taiped is working toboost the quality of tourism infra-structure through the privatisation of14 regional airports that handle thebulk of traffic to the islands. Bindingoffers are due this month for two sep-arate clusters of airports.

A further project, to be awarded bythe transport ministry at the end ofthis year, covers a concession to buildand operate a new international air-port on a greenfield site in centralCrete to replace an outdated facilityat Heraklion, the island’s capital.

Ioannis Emiris, Taiped’s chief exec-utive, says the new regional airportoperators will be expected to invest€300m over the next four years. “Wewant to upgrade facilities, securityand operations to the high standardsof Athens international airport.”

Drive upmarket as visitor numbers soarTourism Capitalprojects point to abrighter future, writeDimitris Kontogiannisand Kerin Hope

Ready for take­off: the former Athens International Airport is to be redeveloped into a tourism and leisure hub Getty

Christina, an Athenian inher mid-40s, has been livingon the streets of the Greekcapital since losing her joband her home more thantwo years ago.

“I feel my situation getsmore desperate everyweek,” says the formersupermarket employee,interviewed at a day-carecentre in Metaxourgeion, agritty central neighbour-hood. The centre is run byPraksis, a Greek non-governmental organisationworking with the country’s“new poor”.

Christina spends two orthree days a week job-hunt-ing all over the city. Likeother Greeks left destituteduring the country’s deep-est recession on record, sheeats a daily meal at a soupkitchen run by the Athensmunicipality, and uses theday-care centre to take ashower and wash clothes.

The Praksis centre isbacked by the Stavros Niar-chos foundation (namedafter the late Greek ship-ping tycoon) as part of athree-year, €100m pro-gramme that funds GreekNGOs attempting to allevi-ate high levels of povertyand social exclusion – nowbelieved to affect about one-third of the population.

Private donors havehelped plug a yawning wel-fare gap caused by a 40 percent cut in social spendingas Greece implemented anausterity programmeagreed with internationallenders. The Niarchos foun-dation came up with thelargest single donation, fol-lowed by a €25m grant fromthe international financierGeorge Soros’s own founda-tion.

Greek companies havemade smaller cash dona-tions and contributed inkind, supporting social gro-ceries and providing com-puters and other equipmentto NGOs. The Greek ship-owners’ union, representinghundreds of Athens-basedowners, has faced criticismfor delaying a planned€25m donation because of atax dispute with the govern-ment.

Epaminondas Farmakis,founder of Elpis, an Athens-based consultancy for phi-lanthropists and donors,says: “It’s unfortunate thatwealthy groups such asshipowners and industrial-

ists don’t seem interestedenough in alleviating socialpain through collectiveaction. These very highpoverty rates will have animpact on the environmentand on society, eventuallyaffecting everyone’s qualityof life.”

Some hope that asGreece’s economy recovers,the government will be ableto claw back more funds forwelfare spending. A €230mincome-support package isbeing prepared for Greekswith monthly incomes of€400 or less who live inrented accommodation.

A new round of EU struc-tural funding is expected toprovide €1.3bn of fundingfor social programmesincluding retraining for the

long-term unemployed andcash for poverty alleviationprojects that would be man-aged by NGOs.

Yet private donors willstill be vital to protectingvulnerable groups, Mr Far-makis says. “Past experi-ence shows that disburse-ment of funds from EU pro-grammes can be delayed forthree to five years afterthey’re approved.”

Niarchos, a global donorwhich also supports thearts, has set new bench-marks for NGO operationsin Greece, carrying out rig-orous due diligence beforeawarding grants and requir-ing strict accounting prac-tices.

John Zervakis, the foun-dation’s chief operatingofficer in Athens, says:“With a few exceptions,Greek NGOs are not in aposition to absorb large

amounts of funding. There’sa need for capacity buildingand for education in philan-thropy.”

Praksis, one of Greece’slargest NGOs with 150 paidstaff, including a full-timefundraiser, and an annualbudget of more than €10m,has been a big beneficiaryof the Niarchos programme.

In addition to the Athensday-care centre, Praksisoperates a mobile medicalclinic in the capital, runs aprogramme to enableimpoverished families tostay in their homes, andhas opened a shelter in theport of Patras for youngirregular migrants whoarrive in Greece withoutadult relatives.

“The needs are large andvaried, because so much ofGreece’s middle class hasbeen wiped out by the cri-sis,” says Tzannetos Anty-pas, chairman of Praksis.

Lazaros Papageorgiou,founder and director ofArtos-Drassi (Bread-Action),which supplies staple foodsand serves meals to impov-erished families in thedecaying industrial suburbsof western Athens, saysdonations in cash and kindhave fallen by 50 per centover the past year even asmore people seek help.

“In spite of better eco-nomic figures, we seeincreasing demand both forbasic foodstuffs and formeals,” he says.

Last year, Artos-Drassiextended its activities totwo northern regions ofGreece, where strong familysupport networks and wide-spread ownership of small-holdings to grow food untilnow eased problems causedby a jobless rate of morethan 45 per cent.

“Severe poverty is nolonger confined to Athensand other big cities,”Mr Papageorgiou says. “It’shappened slowly, but evenin the provinces, families’resources are close to beingexhausted.”

Donors step in to assistthe victims of austerityPhilanthropy

In spite of some help,NGOs are reportingworsening povertyand a funds drought,writes Kerin Hope

Hard times: protesters demand help for the homeless Getty

‘Even in theprovinces, families’resources areclose to beingexhausted’