Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Party's over and the hangover's hard to cure

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Greece is a frustrating country.

It is experiencing a huge economic downturn, but there are few signs of any preceding boom as is evident in Ireland and Spain.

As well, there are almost no political posters or banners, even though the country is having a vitally important general election on Monday .

The poll could decide the future of the euro, and as one old man in an Athens square put it "Greece is the first domino in the fall of the euro".

Greece had a residential property boom but the root causes of its problems are persistently large government deficits, huge public debt, an undiversified economy, corruption and the non-payment of tax, particularly by the rich.

Tax avoidance is a national pastime in Greece, particularly for the wealthy. This could classify it as a utopian state as far as Sir Bob Jones is concerned as he wrote in his first Herald column last week, "There is only one indisputable fact about tax, namely, that by definition it is theft".

Most of the rich don't pay tax in Greece and, as a result, there is a big gap between government expenditure and revenue.

One of the consequences of this is the severe government-debt driven recession and Sir Bob could find plenty of cheap property investments in Athens, as the city is full of graffiti-covered empty buildings.

The only problem with buying Greek property is that its new currency will collapse if the country leaves the euro and investment values will plummet in foreign currency terms.

Greece joined the Economic Union in 1981 and adopted the euro in 2001. The euro replaced the drachma, which was the world's oldest currency with a history going back 3000 years.

The Greek economy boomed on cheap money and the 2004 Olympic Games added to the momentum. Athens built a new airport, a motorway from the airport to the city and an underground rail system.

But the Olympic facilities cost far more than forecast, there was little or no planning for the post-games period and many of the Olympic facilities are now disused and in decay.

Greece also won the 2004 UEFA European Championship as a 100 to one outsider. This was an additional boost to the country's morale.

The UEFA Championship, held every four years between soccer world cups, is now being played in Poland and Ukraine, and Greece Italy, Ireland and Spain have qualified.

This is proving to be a welcome distraction from the economic woes these countries are experiencing.

Although Greece had an economic boom in the early 2000s there were already clear warning signs, as the government was running a large deficit in excess of the EU guidelines of 3 per cent of GDP.

Subsequent revisions show the government deficits were even bigger than reported at the time because large expenditure items were not disclosed.

The Greek government was borrowing heavily overseas to fund its deficit and residential property prices doubled between 2000 and 2008 as purchasers took advantage of low euro area interest rates and easy credit from overseas.

The Greeks were borrowing overseas to fund deficits or to invest in assets that generated no overseas income. This is a recipe for economic disaster.

The economy nosedived in the second half of 2008,

GDP has contracted sharply, the government's deficit has skyrocketed to more than 10 per cent of GDP and government debt has soared.

Retailing has contracted sharply; sales were down 7.2 per cent last year.

The country has a huge amount of empty retail space, although malls have performed better than traditional outlets.

The Greek economic situation continues to deteriorate and this is why there is strong opposition to the EU-imposed austerity measures and great political uncertainty.

The building industry has virtually collapsed, and residential property prices are down 20 per cent from their 2008 peak.

March retail sales were down 15.1 per cent on a year earlier, and unemployment has risen from 20.7 per cent at the end of last year to today's 21.9 per cent.

A frightening 52.8 per cent of under 25s are unemployed.

The streets are full of young adults, particularly immigrants, begging, trying to sell cheap products or offering to clean windshields at traffic lights.

Greece is dominated by small businesses, which are struggling, and the Athens Stock Exchange has plunged more than 90 per cent from its 2008 peak.

The country's great hope is tourism, which attracted 17.5 million foreign visitors last year.

But the industry is forecasting a 10 to 15 per cent reduction in foreign tourist numbers this year because of the negative publicity associated with the country's economic woes.

However, there are no signs of disruptions or riots in Athens, although many riot police are stationed around the main university.

University students are clearly frustrated with the hopeless political management of the country in recent years.

The Greek Parliament has traditionally been dominated by the centre-right New Democracy or the centre-left PanHellenic Socialist Movement (Pasok) - which is no more left of centre than the New Zealand Labour Party.

The country has a reinforced proportional representation system.

There are 250 seats up for election but the party with the largest vote is allocated an additional 50 seats and Parliament has 300 MPs.

Parties must receive at least 3 per cent of total votes to have an MP.

The economic downturn has completely changed the Greek political environment.

The combined vote of New Democracy and Pasok plunged from 77.4 per cent in the October 2009 general election to 32 per cent in the recent May 6 poll.

Some parties did well last month including the Coalition of the Radical Left (Syriza), led by the charismatic Alexis Tsipras, the Independent Greeks, the neo-Nazi Golden Dawn and the Democratic Left.

The combined vote of these four parties increased from 4.9 per cent in 2009 to 40.5 per cent last month.

The Communist Party, the other party to win seats on May 6, increased its vote from 7.5 per cent to 8.5 per cent.

New Democracy slightly out-polled Syriza in May, by 18.8 per cent to 16.8 per cent, but was not able to form a government, which is why a further poll is being held on Monday.

The momentum is with Syriza in Athens and New Democracy in the rural areas.

It is difficult to predict the outcome because there are no regular opinion polls and Greeks are unwilling to express their political views because of frustration with recent developments.

As well, there is little political advertising.

This is because the political parties have run out of money - as have most Greek organisations - and are relying on social media to promote their views.

The Greeks insist that Monday's vote is a general election, and not a referendum on the euro.

They claim that both New Democracy and Syriza want to keep the euro, although Syriza will reverse the EU-imposed austerity measures as the country is in its fifth year of economic recession and economic conditions, particularly employment, are continuing to deteriorate.

International financial markets are expected to remain volatile next week as it is highly unlikely that the election will produce a sustainable coalition government even though the party with the largest vote will obtain an additional 50 seats.

The basic problem is that most Western countries, including New Zealand, have lived well beyond their means over the past 20 years, and Greece is just the worst example of this.

The borrowing party is over and we are now experiencing the hangovers, particularly in Europe. These hangovers are not easily cured.

Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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