FINANCIAL TIMES SPECIAL REPORT | Monday June 2 2008
Athens sends investors positive signals
Kerin Hope looks at a new readiness to deal with foreign strategic partners
hether by luck or judgment, Greece is becoming more investor-friendly, more ready to stand up for its perceived interests and, in some sectors, better organised. The €3.2bn sale to Deutsche Telekom of a 25 per cent strategic stake in Hellenic Telecom (OTE), the Greek public operator, agreed last month, marks a long-awaited turnaround in attitudes towards foreign investment. In 1993 the centre-right government fell from power amid fierce opposition to a similar deal involving France Telecom. Several public corporations, OTE among them, were partly privatised later through flotations on the Athens stock exchange, but the state kept control of management. This time is different. The German operator will run OTE and appoint the chief executive – although the Greek state will have an equal number of board seats. Costas Karamanlis, the prime minister, told parliament: “We took a significant step forward. OTE has acquired a strategic partner that will improve its competitiveness and make sure it remains outward-looking.” Greece lags Portugal, Ireland and its Balkan neighbours in attracting foreign direct investment. Apart from the state’s reluctance to cede control of public corporations, administrative obstacles – including corruption – and its small market are the main reasons, consultants say. Inflows of FDI amounted to €1.4bn last year compared with outward investment by Greek companies of €3.9bn, of which almost two-thirds was directed towards southeast Europe. Mr Karamanlis hopes the Deutsche Telekom deal, together with a €700m port privatisation project due to be completed this summer, will send a positive signal to investors. China’s Cosco group and Hutchison Port Investment,
based in Hong Kong, are bidding for 30-year concessions to build and operate container terminals at the ports of Piraeus and Thessaloniki. A third operator, Dubai Ports World, is bidding for the Thessaloniki concession. The aim is to transform Greece’s two largest ports into transit hubs for container traffic moving from Asia to western Europe and the Black Sea. Other infrastructure modernisation projects are in the pipeline. George Alogoskoufis, the finance minister, says: “We see regional ports and airports being developed as public-private projects involving both foreign and domestic investors.” Union resistance to privatisation persists, with backing from the opposition Pan-
Union power has been eroded after five years of rising living standards – the result of wage increases and the availability of loans
hellenic Socialist Movement. Mr Karamanlis’s reform programme is modest in scope. Yet he has had to face a broad range of strikes and protests, from students and university teachers opposing the introduction of time-limits for completing a first degree, to service industry workers who fear that mergers of state-controlled pension funds would result in lower pay-outs in the future. But the unions’ power has also been eroded following five years of rising living standards – the result of wage increases and the widespread availability of loans –
and the modernisation of practices at state-controlled corporations. Shipping and tourism, the highest-earning and most competitive sectors of the Greek economy, each contributed revenues of about €20bn in 2007. The shipping community, which has been gradually rebasing in Athens over the past decade, has invested profits from the China trade in land and property in Greece. High-end tourism has increased, led by wealthy Russian visitors. The official unemployment rate averages about 8 per cent – the lowest since records began. Among heads of households the figure is less than 5 per cent but rises to more than 15 per cent among women and entrants to the workforce. While these figures are still well above the EU jobless average, Mr Alogoskoufis says there are plenty of jobs in the grey economy that go unrecorded. Mr Karamanlis’s New Democracy party, re-elected to a second term last September, has an overall majority in parliament of just two seats. But government stability has not yet been threatened, partly because it can call on the support of a dozen deputies from the right-wing Laos party, but partly because of Pasok’s lack of direction. The Socialists have been losing ground to the Coalition of the Radical Leftthat appeals to young voters disillusioned with the two main parties. With 14 seats in parliament, it has highlighted the government’s poor record by comparison with European partners on issues such as environmental protection, reducing carbon emissions
Ancient heritage: the Parthenon on the Acropolis in Athens, where restoration is underway and, nearby, a new museum has been built to house findings and the treatment of asylumseekers. A tough line in foreign policy helps to maintain Mr Karamanlis’s approval rating. Greece vetoed Macedonia’s application for membership of Nato at a summit in April, having resisted strong US pressure to compromise in a 15-year dispute over its neighbour’s name. Greece objects to sharing the name of its largest northern province with the republic of Macedonia, which it insists on calling “Fyrom” (The Former Yugoslav Republic of Macedonia). The dispute has not prevented Greek companies from becoming the biggest investors in Macedonia, accounting for about €1bn in manufacturing and services. Greece is willing to resume UN-mediated talks on the name following this month’s parliamentary elections in Macedonia. It remains to be seen whether the new Skopje government is prepared to tinker with a name that has been accepted by the US and the majority of members of the UN. In another break with Greece’s usual policy of close alignment with its western allies, Mr Karamanlis has signed up to join Russia’s “South Stream” project to build a pipeline carrying natural gas across the Black Sea and through the Balkans to western Europe. Gazprom, which already supplies Greece with gas through Bulgaria, is building the pipeline in partnership with Eni, the Italian energy group. One branch would go south to Greece and Italy, through a link across the Adriatic. The other would go north to Slovenia and Italy. Joining South Stream gives Greece a chance to further its goal of becoming a regional transport hub for oil and gas. It is already a partner with Russia and Bulgaria in a project to ship oil through a pipeline linking the Black Sea with the north Aegean, bypassing the congested Bosphorus strait. Assimakis Papageorgiou, chief executive of Depa, the state-controlled gas utility, says Greece has already ensured sufficient alternative supplies to avoid dependence on Gazprom. Depa and Botas, the Turkish gas utility, last year opened a €300m cross-border pipeline to carry Azeri gas to Greece. Depa is extending the pipeline across the Adri-
Inside this issue
Banking Consolidation Dimitris Kontogiannis looks at the impact of the credit crunch Page 2 Relations with Turkey Bluechip deals have strengthened business ties, writes Kerin Hope Page 2 Corporate Governance Listings are making shipping more transparent, reports Kerin Hope Page 3 Luxury at Sea Diane Shugart examines the race to attract yachting tourism Page 4 The Ability to Excel Yannis Stournaras calls for a new economic model Page 4
atic in partnership with Italy’s Edison group. Greece also has a longterm agreement to buy liquefied natural gas from Sonatrach, the Algerian gas supplier, which is stored in a terminal on Revythousa, an islet near Athens. “South Stream is the biggest project in south-east Europe and an exceptional business opportunity for Greece. Should we turn down an invitation to participate?” Mr Papageorgiou says.
Inf lation fears fail to dent confidence about growth
Investment projects will help Athens to reach its targets, writes Kerin Hope
The longest uninterrupted period of growth in Greece’s modern history is set to slow this year, but George Alogoskoufis, the finance minister, is confident it can be sustained at only marginally lower levels. The economy expanded by an annualised 3.6 per cent in the first quarter, a betterthan-expected result in view of the global slowdown, and just on the nose of the government’s full-year projection for 2008. “With growth at this level we can continue to reduce unemployment and keep budget revenues on track. The problems will start if we fall below the forecast,” Mr Alogoskoufis says. Twelve straight years of growth at around 4 per cent of gross domestic product have raised Greek incomes per head to about 90 per cent of the EU-15 average. With household borrowing levels still less than twothirds of the eurozone average, Mr Alogoskoufis says domestic demand will remain comparatively robust. High wage increases in the private sector, plus cuts in personal income tax, should help offset the impact of higher interest rates. Investment is forecast to remain strong, with Greece poised to draw down about €12bn of funding from the current European structural aid package between 2008 and 2010. A pipeline of public-private investment projects worth more than
€4bn, plus a backlog of projects approved under an updated investment incentives law “give us plenty of ammunition to achieve the growth targets,” Mr Alogoskoufis says. A pick-up in inflation is the real worry, he says. Greece’s headline inflation rate reached 4.4 per cent in April, the highest in the eurozone. Average annual inflation this year is forecast at 4.0 per cent, up from 2.9 per cent in 2007. It does not help that high real wage increases for the private sector are locked into a two-year package agreement, although the basic public sector increase this year has been more moderate. “As well as high energy and food prices and the wage-push factor, there are some Greek market issues that exacerbate the situation,” says Platon Monokroussos, senior economist at EFG Eurobank. Rigid product markets, weak monitoring of retailers and wholesale food providers, and higher costs of transport to the Aegean islands are expected to add to inflationary pressures. Since Greece joined the single currency in 2001, its annual inflation rate has consistently exceeded the euro-area average by about 1 percentage point. “We’ve steadily lost competitiveness since entering the eurozone, while some of our biggest trading partners have seen consistent gains. Although the impact of 1 percentage point a year might not seem huge, cumulatively it’s significant,” Mr Alogoskoufis says. Greece still occupies the lowest place among eurozonestates in reviews of interna-
tional competitiveness, although it has made gains in labour productivity as well as reducing obstacles for investors. It has managed to reduce exposure to the full blast of global competition thanks to a bigger presence in lessdeveloped neighbouring Balkan markets, according to a recent report by the International Monetary Fund. Exports are more diversified and have a higher technology content, the fund says. A switch from lossmaking manufacturing – the textile and clothing sector has moved to low-wage countries in the Balkans – and higher investment in services such as tourism and
‘We can continue to reduce unemployment and keep budget revenues on track’
shipping has enhanced overall competitiveness. However, a widening current account deficit, which reached 14.1 per cent of gross domestic product last year – a level comparable with emerging market neighbours in the Balkans – indicates that structural reforms are needed in order to avoid a sharp adjustment. Athens-based economists say a large current account deficit can be justified, given current strong growth and high levels of investment. Investment by private companies grew by 10.3 per cent in 2007 on top of 13.3 per cent the previous year. Companies have invested heavily in new technology and increased production
capacity for goods that can be traded internationally, with the emphasis on emerging markets. On the other hand, unit labour costs in Greece have risen by an average of 6.7 per cent yearly between 2001 and 2008, compared to 2.7 per cent in the eurozone. “The degree of loss of competitiveness will be determined in the longer run, as the investment decisions play out. Moreover, it’s clear we’re in a cycle of catching up and we’re growing much faster than our trading partners,” says Paul Mylonas, chief economist at National Bank of Greece. Amid increasing economic uncertainty, reform is likely to be gradual. But making the public sector more efficient remains a priority. “We have a long way to go, though we’re moving in the right direction,” Mr Alogoskoufis says. Measures in the pipeline include tighter monitoring of spending by local government, state hospitals, social security funds and other public entities. This year has already seen the introduction of a property sales tax aimed at bringing Greece into line with EU practice and new legislation to prevent tax fraud in the petroleum products industry. A fresh crackdown on value-added tax evasion is underway. Mr Alogoskoufis says the positive effects of previous reforms are starting to be felt. “Take broadband for example. The penetration rate has jumped in three years from 0.1 per cent to 10 per cent. That’s still less than the EU average but we’re growing faster than anywhere else,” he says.
FINANCIAL TIMES MONDAY JUNE 2 2008
Bluechip deals strengthen Turkish business ties
Bilateral investments are building on slowly improving relations, writes Kerin Hope
It is almost a decade since Greece and Turkey unexpectedly grew closer. A new, more tolerant relationship was defined by a shared experience of disastrous earthquakes striking Istanbul and Athens within a space of three months in 1999. There have been ups and downs since, but successive governments have been careful to avoid the hostile rhetoric of the past. From a low base, bilateral trade has tripled to €1.8bn in 2007, reflecting strong growth in both countries.
Foreign ministry officials hold regular, low-key talks on disputes over Aegean sovereignty, and Greece has been a firm backer of Turkey’s candidacy for European Union membership. Greek-Turkish relations are low on the agenda of the Ankara government as it confronts a lengthening constitutional crisis. But economic and business ties have accelerated this year, with several deals involving blue-chip investors coming to fruition. Ziraat Bank, Turkey’s biggest lender, is preparing to open two branches in Greece this summer. The €18m investment will be the largest to date by a Turkish company in Greece. Ozlur Ozenis, Ziraat’s manager for Greece, says he expects to attract both Greek and Turkish customers. The Athens branch is likely to
focus at first on a group of Turkish brand-name retailers and restaurateurs with outlets in the Greek capital. A second branch at Komotini in north-eastern Greece will target a large Muslim minority, mainly of Turkish descent, that is increasingly involved in crossborder trade with Turkey. “It’s taken about two years to reach this point, but we’re confident that, when we launch, business will take off rapidly,” Mr Ozenis says. The arrival of state-controlled Ziraat, which has operations in almost 20 countries outside Turkey, comes two years after National Bank of Greece paid €3.8bn to buy Finansbank, the eighth-largest Turkish lender. National’s move is seen as a landmark deal that has encouraged other Greek companies to
make acquisitions in Turkey with a view to entering the emerging markets of the Black Sea rim and Central Asia. Frigoglass, which produces coolers for the beverage industry, agreed to pay €50m for 86 per cent of Istanbul-based SFA Cooling as part of a strategy of expansion into central Asia. Titan, a cement producer with plants in the Balkans, Egypt and the US, is buying a 50 per cent stake in Adocim, which produces cement at Tokat on the Black Sea, for €90.5m. Halcor, a subsidiary of Stasinopoulos, a metallurgical group with growing sales in Turkey, has acquired a production base in Istanbul by taking control of Sega Bakir, a Turkish copper pipe manufacturer, for €1.5m All three companies are familycontrolled groups listed on the
Athens stock exchange that have become regional multinationals through expansion in the 1990s into Balkan markets. By contrast, Turkish business in Greece has focused on franchise arrangements, mainly in Athens and northern Greece. “There’s a mismatch here – Greece exports capital to Turkey and Turkey exports goods to Greece,” says Ioannis Grigoriadis, a specialist in GreekTurkish relations at Athens University. Istikbal, a furniture and mattress producer, has penetrated the Greek market by targeting the Muslim community in Thrace, while Turkish clothing brands such as Koton and Mavi are well established in Athens shopping centres. Two Turkish restaurant chains, Tike and Kösebasi, have
several outlets each in Athens. The trade balance is currently tilted in favour of Turkey, with Greece importing half as much again as it exports to its neighbour. Turkey also gains in services, with more than 500,000 Greek tourists travelling to Istanbul yearly but only about 100,000 Turks visiting Greece. “There’s strong evidence that, as relations improve at the political level, business follows quickly – and growth in bilateral trade far outpaces that of these countries’ trade with the rest of the world,” says Fiona Mullen of Cyprus-based Sapienta Economics. Analysts say that, in spite of sustained goodwill at the political level, mistrust in both countries at the administrative level has slowed the pace of trade and investment. Turkish businesspeople say
they face delays getting residence permits to live in Greece, while Greek exporters complain about bureaucratic hurdles that appear to violate the terms of Turkey’s customs agreement with the European Union. With growth slowing in both countries, the outlook for bilateral trade could become less favourable, some analysts say. Constantine Papadopoulos, European affairs adviser at EFG Eurobank, says: “The composition of Greek-Turkish trade suggests that the rapid growth of recent years may not be immune to a slowdown effect.” Greece would be more affected by a slowdown, as its main exports to Turkey are petroleum products and raw cotton, while Turkish exports are more diversified and include a high percentage of manufactured goods.
Merger likely amid credit crunch Slow progress
A slowdown makes consolidation more possible, Dimitris Kontogiannis says
he global credit crunch has not affected the Greek banks’ strategy of continued expansion in south-east Europe and the eastern Mediterranean, but it could trigger at least one large merger in the domestic market. Greek banks escaped being involved in the subprime lending crisis, partly thanks to their focus on “plain vanilla”, or straightforward, banking at home and rapid organic growth in the region’s emerging markets. But slowing economic growth both in the domestic market and neighbouring countries means earnings targets will be harder to achieve this year. Banks face a sharp rise in funding costs as they rely on more expensive deposits to finance expansion abroad and tougher conditions in international wholesale markets. Deposit spreads have been compressed, while the gradual re-pricing of loans has yet to show up fully on asset spreads and loan volumes. According to analysts, EFG Eurobank is expected to raise around €3.5bn in wholesale funds this year to fund expansion abroad, compared with €4.5bn for Alpha
Kerin Hope Athens Correspondent Dimitris Kontogiannis FT Contributor Diane Shugart FT Contributor Robert McDonald FT Contributor Yannis Stournaras Professor of Economics, Athens University Gavin O’Toole Commissioning Editor Steven Bird Designer Greg Meeson Picture Editor For advertising, contact: Lee Wilson on +44 (0) 20 7873 3725 email: email: email@example.com, or your usual Ft representative
Bank and about €2.5bn for Piraeus Bank. Funding requirements this year at National Bank of Greece, the country’s biggest lender with a loan-to-deposit ratio that stood at 92 per cent at the end of 2007, are estimated at around €500m. However, National is boosting its capital through an issue of preferred shares worth up to €1.5bn. It has also saved more than €450m by distributing the bulk of its dividend in the form of new shares, and plans a covered bond issue of at least €1bn. Such high levels of liquidity suggest it is gearing up for an acquisition. Speculation continues over a possible merger between National and Piraeus. Although both banks denied holding talks, insiders are certain they took place. “It appears that the two sides came close to an agreement, suggesting that it would be a mistake to consider the deal dead,” a senior Athens-based banker said. In the prevailing climate, a foreign bank is seen as an unlikely market entrant. Emporiki Bank, acquired by France’s Crédit Agricole, posted losses in 2007 as a two-year restructuring continued. A merger between two of Greece’s “big five” banks would provide synergies in the region’s emerging markets, where branch networks could be complementary. But it would require considerable downsizing in Greece, where labour laws are rigid and there is strong opposition to lay-offs. A big domestic deal would involve a stock swap for its largest part, making comparable valuations important. But National, the most likely driver of such a deal, has lately been trading at a lower price-earnings ratio, based on estimated 2008 profits, than some of its peers. A merger would boost National by reducing risk and diluting the influence of the Greek state, which indirectly controls a shareholding of about 15 per cent. Foreign operations accounted for about 38 per cent of group earnings at the end of 2007, with the largest chunk coming from Turkey’s Finansbank. National also has networks of subsidiaries in Albania, Bulgaria, Cyprus, Macedonia, Serbia and Romania. It is a shortlisted bidder for a majority stake in Egypt’s state-controlled Banque du Caire. As the banks scramble for deposits, Hellenic Postbank has emerged as a possible
in bid to turn Athens green
Robert McDonald looks at proposals for the capital and obstacles they face
The view from Lykavettos hill in the centre of Athens is of dull white apartment blocks in every direction. The Greek capital is one of Europe’s most crowded cities, with population densities in some neighbourhoods approaching those of Hong Kong. Athens has about 2 sq m of green space for each resident, compared with 27 sq m for Amsterdam and 64 sq m for London – and a World Health Organisation recommendation of 50 sq m. However, a series of urban regeneration projects – including a suburban site used for the 2004 Olympic Games – could expand parkland and transform several neglected neighbourhoods. Apart from the Games venue at Elleniko, the capital’s former international airport, these include Votanikos, a run-down district of abandoned factories and lorry parks, near the city centre, and two coastal areas – the Faliron Delta, formerly a horse-racing track, and Drapetsona, once the site of Greece’s largest chemicals factory. Yet progress is slow because of political infighting, funding problems and differences over how the sites should be redeveloped. Local municipalities are disputing the government’s proposals to transform the dusty 600-hectare site at Elleniko into one of Europe’s largest parks. The government says the €700m project should be financed out of proceeds from building a business centre and low-rise apartment blocks for about 20,000 residents on part of the site, which would retain several Olympic sports venues. According to George Souflias, the public works minister, income from the building project would support the establishment of a “Green Fund” to create more parks around Greece. The mayors of four municipalities close to the airport site object to the building project on the grounds that the district is already densely populated. Environmentalists are more concerned about dayto-day management of a large green space. “The only guarantee that this project will work is if the surrounding municipalities take responsibility for maintaining it, with the help of local volunteers,” says Thedota Nantsou of the Worldwide Fund for Nature’s Athens branch. Encroachment has started, with state-controlled companies assigned to develop a commercial exhibition centre in the former international terminal building. A depot for the city’s tram network has already been built. The Olympic kayak slalom course has been turned over to a private company to develop a water park. Stefanos Manos, a former finance and public works minister, says the Elleniko park should cover just 100ha, with the remainder being re-zoned for high-end residential and commercial
Merger speculation: a customer enters an Athens branch of Piraeus bank, which insiders say was talking to National acquisition target. It is listed on the Athens stock exchange but the state still holds a 45 per cent stake and has control of management. Postbank’s results have been mixed since its listing, but its €11bn deposit base looks attractive. Eurobank, which has a loan-to-deposit ratio well over 100 per cent, has built up a stake of about 6 per cent in Postbank. The two are seen by analysts as a perfect fit. National was quick to follow Eurobank’s example. It has acquired 5.1 per cent of Postbank, signalling that it intends to compete if a privatisation contest is announced. Alpha, Piraeus and Cyprus-based Marfin Popular Bank have also shown interest in Postbank. But the government insists Hellenic Postbank should either remain independent or make an alliance with a similar European bank. Both France’s Caisse d’Epargne and Deutsche Post have been mentioned as possible candidates.
Consumer credit group pioneers outward investment
Tamara Voina came to Easy Credit for a personal loan to finish building a house in the Moldovan capital Chisinau. She was afraid, she says, that prices of construction materials would rise, delaying completion of her new home. Mrs Voina, a civil servant, took out a Leu30,000 (€1,700) loan with a 36month maturity on the same day that she made the application. “Prices did jump but, thanks to the loan, I’d already had all the brickwork and plastering done,” she says. Like many Easy Credit customers, she paid back the loan early. Recently, she took out a second loan to finish equipping her new kitchen. In addition to personal loans with flexible maturities, the Chisinaubased consumer credit company provides loans for buying furniture and household appliances through deals with local retailers. The company was set up three years ago by Damianos Damianos, an Athensbased investment banker who worked for the International Finance Corporation in Poland, then managed a Greek venture capital fund investing in southeast Europe. “Our fund had invested successfully in a Moldovan bank so we knew the market quite well. I saw an opportunity to create a profitable microfinance operation with good prospects for expansion,” Mr Damianos says. Although Moldova is still Europe’s poorest country, it is starting to catch up with its southeast European neighbours. The economy has been growing by more than 6 per cent yearly, supported by annual remittances exceeding €1bn – equivalent to about 50 per cent of gross domestic product – from Moldovans working in Russia and western Europe. From a low base, privatesector credit is growing rapidly but consumer credit lags lending to businesses. While banks offer lower interest rates for consumer lending than Easy Credit, it takes longer for a loan to be approved and there is more bureaucracy. “We can make the checks quickly and take a decision, often within 90 minutes,” says Corneliu Cerbari, the Chisinaubased general manager. Unlike the banks, Easy Credit does not require collateral to make a loan. Its main criterion for lending is that a customer’s monthly disposable income is at least four times the amount of a loan instalment. Mr Cerbari says demand for credit is accelerating. Easy Credit is currently handing out an average of 100 loans a week, compared with 75 a week throughout 2007. The network has grown to 13 outlets, including two offices in provincial cities and 10 representatives working on their own. “We need to sign up more people outside Chisinau to handle demand,” Mr Cerbari says. George Kamarinos, an IT specialist and Mr Damianos’s partner, used his experience of developing systems for consumer credit departments at Greek banks to set up a fully webhosted system that can be run from Athens. “We give our representatives a link to the website and they can set themselves up,” Mr Kamarinos says. “There’s no heavyduty support.” One advantage is that the partners can monitor operations in Easy Credit chief Damianos Damianos real time from a remote location and receive instant accounting information. Another is that low fixed costs have allowed Easy Credit to make a profit on a relatively low volume of lending. “We use a Greek company to maintain and upgrade the system on a contingency basis, and I visit the office every month to take care of finetuning,” Mr Kamarinos says. Easy Credit’s outstanding loans doubled to Leu63m last year and increased to Leu78m by midMay, with personal loans accounting for more than threequarters of lending volume. Net profits after provisions reached Leu10.8m last year and stood at Leu6m in midMay. Income from penalties for late payment is currently higher than the amounts that are overdue, Mr Damianos says. He says the next step will be to expand into other underpenetrated markets for consumer credit, such as Belarus and Georgia: “Our model has worked well in Moldova so we’d like to take it elsewhere.”
development. Funds raised from land sales should be used to acquire sites for as many as 100 small parks ininner city districts. “Mothers and children need a park within walking distance of where they live,” he says. “Having so many parks in central Athens would dramatically change the quality of life and would increase property values nearby.” The 20ha Votanikos site close to the capital’s commercial centre, which was scheduled for redevelopment in the mid-1990s, also fell prey to disputes between government and private developers, which means its redevelopment will not be as green as planned. Panathinaikos, a Greek football club that agreed to swap its stadium for a site at Votanikos is spending €88m on a new 60,000-seat ground due to open for the 2009-10 season. It was to be situated within a 12ha park to be developed by the Athens municipality. But Babis Vovos International, Greece’s largest private property developer, acquired a large plot in Votanikos next to the redevelopment site. It is building a €250m, 70,000 sq m shopping mall, which will be the biggest in Greece upon completion in 2009.
Income from the Elleniko project would support the establishment of a ‘Green Fund’ to create more parks
George Souflias Public Works Minister
The Faliron race-track was removed to make way for five indoor Olympic venues, which were offered on a build-operate-transfer basis to private contractors. The project was abandoned and the venues were built elsewhere because of lack of interest from local construction companies. Faliron is now set to become a 12ha “cultural park”. The Niarchos Foundation, set up by the late Greek tycoon Stavros Niarchos, has signed a memorandum of understanding with the government to build a €300m complex including a new National Library and National Opera House, surrounded by playing fields. Debate continues over the redevelopment of Drapetsona near Athens’s port of Piraeus. The 640ha site includes plots owned by National Bank of Greece, the country’s biggest commercial lender; Heracles, a cement plant controlled by Lafarge of France; BP, the UK petroleum group; and Piraeus Port Authority. The municipalities of Drapetsona and Keratsini – both low-income, high-density districts – want to develop the site as a seaside park, but the companies are pushing for commercial re-development with some housing.
FINANCIAL TIMES MONDAY JUNE 2 2008
Island of prosperity sets new standards
Fish farming makes waves
From small beginnings, Greece has become the Mediterranean’s largest producer of farmed fish, with more than 200 fattening units spread around sheltered bays in the Aegean and Ionian islands. Nireus, the biggest Greek aquaculture company, has set its sights on becoming a globalsized producer, says Aristeides Belles, chairman and chief executive. Its vertically integrated operation goes from hatcheries that produce 200m juvenile fish yearly to packaged and branded fillets for upscale supermarkets. “We have a 12 per cent market share in the Mediterranean and a reputation for producing highquality fish. But we’re only starting to exploit the potential of this business,” Mr Belles says. He quotes statistics from the UN Food and Agriculture Organisation to show that aquaculture already accounts for 45 per cent of global fish consumption. The projection for 2020 is 80 per cent. Last year, Nireus exported half its output of 26,000 tonnes of fresh sea bream and sea bass. Most went by refrigerated truck to western Europe, with small quantities flown to the US and Canada. Mr Belles started growing fish in 1988 on his native Chios, adapting Norwegian salmonfarming technology to produce bream and bass in Mediterranean waters. At first, losses were high. Young bream escaped from sea cages by chewing through netting, while bass were susceptible to disease. “We were pioneering sea farming in the Mediterranean so it was a steep learning curve,” Mr Belles says. Nireus’s original farm at Kardamyli still operates with fish cages being moved regularly to allow the seabed to recover. A unit on the Turkish coast opposite Chios will become a base for entering the local market, where demand is projected to increase. But most of its 60 fattening units are located off islands closer to European markets. Italian consumers, for example, buy about 30 per cent of Nireus exports. With Mediterranean output increasing at a rate of 10 per cent yearly, fish prices have fallen sharply, forcing Nireus to diversify. A processing unit near Athens sells filleted fish under the Nireus brand to Greek supermarkets. Last year, Nireus acquired a genetics company focused on improving the quality of eggs. The aim is to cut the time required to grow bream to marketable size. A plant on Chios produces sea cages. The company also acquired a Greecebased fish feed producer to supply other growers. Consolidated group sales increased 33 per cent to €214m last year with earnings before interest, tax, depreciation and amortisation up 38 per cent to €37.8m. With careful husbandry, Greek fish farmers can now expect to bring to market about 90 per cent of their bream and bass stock. But it has taken more than a decade to develop the technology for growing sole, another popular Mediterranean fish, in commercial quantities. Mr Belles says Nireus intends to start commercial production of sole in giant tanks on land: “Unlike bream, they don’t swim in vertical shoals – they need a spacious sandy seabed.” His mediumterm aim is to expand beyond the Mediterranean to tropical waters – where the fastgrowing cobia fish reaches market size after only six months in a cage. Mr Belles took Nireus public in 1995 through a listing on the Athens stock exchange. Last year it became the biggest shareholder in Marine Farm, a Norwegian aquaculture company that produces salmon in Scotland, bream in Spain and cobia in Belize. “We think the Caribbean offers the right conditions for growing cobia. And the US is a very large market close by,” he says.
Kerin Hope looks at how shipowners revived a remote Aegean community
n July and August the population of Oinoussa, a small island lying between Chios in the north-east Aegean and the coast of Turkey, jumps from around 500 people to more than 3,000. With fewer than 30 hotel beds, the island offers few facilities for ordinary tourists. Its summer visitors are Greek shipowners with roots there, their extended families and guests. Some open up refurbished family mansions built during Oinoussa’s glory days early in the 20th century. Others stay on yachts in a picture-postcard harbour protected by two offshore islets, each capped with a whitewashed church. Oinoussa is unique among the 40-odd remote Greek islands that are still inhabited year-round, thanks to years of carefully targeted philanthropy. “If the shipping families hadn’t stepped in, the island would have been abandoned – everyone would have moved either to Chios or Athens,” says John Pateras, an Oinoussan ship operator. Situated on a main Mediterranean trading route, within easy sailing distance from Chios and the
coast of Anatolia, Oinoussa was once a showcase for the Greek shipping industry. From the 1860s, Oinoussan families pooled their resources to build ships that were crewed and managed by family members. In its heyday, the Oinoussa-controlled fleet numbered about 300 ocean-going ships and its leading families opened offices in Piraeus and London. The island fell into decline after the second world war. To rebuild their fleets, shipowners needed access to modern communications, banks and brokerages. The rescue effort was led by the Pateras and Lemos families, both among the island’s wealthiest. They funded much of the infrastructure that makes it possible for families to live on Oinoussa year-round – and encouraged other owners to participate. The donations include two high schools, a full-time doctor’s position, a desalination plant, and an island-based car ferry that makes a daily return journey to Chios. The government paid for undersea cable links with Chios providing electricity and, recently, broadband internet access. “If you have children, it really matters to have a doctor on call and a regular water supply,” says Mariana Iliopoulou, a graduate in hotel management who runs the citizens’ advice bureau and mayor’s office.
Playground for the rich: Greek shipowners have long favoured Oinoussa between Chios and Turkey’s coast Education has traditionally been a priority for Greek philanthropists. The island’s high schools – one, a vocational school for training merchant navy officers – have 65 students and 25 teachers, the country’s highest pupil-teacher ratio. Facilities include luxuries unknown in the state education system, such as “smart” classroom whiteboards linked with personal computers, and optional tennis lessons. Students who win a university place receive grants equal to a junior civil servant’s salary from the island’s benefactors. Graduates of the merchant navy school are guaranteed well-paid jobs, given that the fleet under the Greek flag is short of officers. Panayotis Kounis, head-teacher at the high school and curator of a generously endowed naval museum, has the delicate task of matching the philanthropists’ proposals with the island’s needs. Evangelos Angelakos, the mayor, is trying to reduce Oinoussa’s reliance on hand-outs from wealthy expatriates. He wants to see a limited amount of high-end tourism – such as university summer schools and small-scale conferences – that would create new jobs and attract more permanent residents. A shipowner who divides his time between Piraeus and Oinoussa – a six-hour commute by motor-yacht – he pursues funding from European Union programmes and the government budget. “My job is to make sure the island doesn’t miss out on money it’s entitled to. Because of Greece’s administrative weakness, it’s a time-consuming process that has to be done
‘The philanthropists have done a tremendous job but, inevitably, that’s created dependency’
“It’s good to have a football stadium, but we also appreciate having an amphitheatre with excellent acoustics for music and theatre performances,” he says.
from Athens,” he says. Under his stewardship, the harbour has been enlarged to make room for larger vessels. EU funds have been secured to help finance new water distribution and waste collection systems, and a waste treatment plant. Completing a ring road that would open up more beaches to tourists is also a priority. A luxury resort project is under discussion. Making Oinoussa a regular stop on the ferry route from Piraeus would put it properly on the map, he says. “The philanthropists have done a tremendous job for the island but, inevitably, that’s created a culture of dependency. We need to revive a spirit of entrepreneurship,” he says.
Market listings sink the ancient tradition of secrecy
Kerin Hope reports on transparency in a key industry
A steady stream of listings of Greek shipping companies on New York exchanges or on London’s Aim market in the past three years has broken a tradition of secrecy in the country’s largest industry. More than 20 Greekcontrolled ocean-going shipping companies have come to market during the current global shipping boom, raising several billion dollars to help finance fleet expansion and renewal on an unprecedented scale. Five years of sustained fleet renewal reduced the average age of the Greekcontrolled ocean-going fleet below the world average for the first time last year. This trend is set to continue with orders for new vessels by Greek owners exceeding €38bn at the start of this year. The flotations have contributed to improved transparency in an industry dominated by closed family businesses. They have also accelerated the development of corporate structures suited to managing bigger fleets. Yet corporate governance remains a divisive issue for the Greek shipping community, and senior managers of listed companies have clashed publicly with large shareholders. Greek shipping companies that have listed on the New York stock exchange have benefited from a “reputation effect” that has kept share prices more buoyant than for their peers on Nasdaq, says Nickolaos Travlos, finance professor at the Athens Laboratory of Business Administration. But NYSE-listed companies are just as likely as others to be managed along traditional lines, with most decision-making handled by one key manager – usually the founder of the business. “Management is still highly centralised with not much room for delegating
Well stacked: Greek shipping companies benefit from a ‘reputation effect’ and not much accountability,” Prof Travlos says. Given a lack of qualified independent professionals in the Greek shipping business, the boards of listed companies usually consist of relatives and other people closely associated with the owner and his family – retired bankers, lawyers and insurers. While the quality of fleets operated by the listed companies is higher than the Greek industry average, the focus is still on expansion as the guarantee of future earnings – from asset sales rather than long-term charters. “There’s a lot of compliance activity by shipping companies that have listed and disclosure is not a problem. But, so far, the culture hasn’t changed,” says Ilias Visvikas, an assistant professor at ALBA. Owners who have listed companies recently are usually members of a new generation with a formal business education, rather than the former sea captains who used to dominate the industry, according to Gelina Harlaftis, an historian at the Ionian University in Corfu. Consolidation has reduced the number of significant industry players to around 180 companies operating fleets of at least five vessels. “There’s been quite a big turnover in the industry since the crisis of the 1980s. The current generation of managers are more sophisticated, although the practice of arbitrary decision-making hasn’t been dropped,”Ms Harlaftis says. Some Greek owners acquired their first experience of international capital markets in the mid-1990s by issuing high-yield junk bonds in the US to finance fleet expansion. These ventures ended unhappily for many investors, with 17 out of 18 Greek issuers eventually defaulting on their bonds while in many cases retaining control of at least part of their fleet.
‘Management is still highly centralised with not much room for delegating and accountability’
Concern persists that Greek owner-managers may be tempted to put their private interests ahead of their obligations to investors, Mr Visvikas says. The fragmented structure of the Greek industry allows for potential conflicts of interest, with owner-managers using their private companies to supply management services or sell ships to the listed entity. Abrupt decision-making by owner-managers and their close associates without con-
sulting shareholders also gives cause for concern. In one such case DryShips, a bulk carrier company listed on Nasdaq, unexpectedly decided to invest $400m in a Norwegian company that owns two deepwater oildrilling rigs – an operation seen as having a bright future as oil supplies shrink. The global credit crunch has stalled Greek owners’ plans for further public offerings, while some listed companies have been seeking other means of funding. Top Ships, listed on Nasdaq, generated a strong reaction last month when it disclosed it had made a private offering of shares at a 15 per cent discount to family members and close associates of its managers. Owners agree that the current boom, driven by demand for commodities in China and India which has kept charter rates high, is winding down amid a global economic slowdown. There are fears that an over-supply of vessels after 2010, when the current round of new ships is due for completion, could send charter rates plummeting. The Greek industry is likely to consolidate further if the slowdown is prolonged, analysts say. “The next stage of consolidation is likely to produce a more recognisable corporate model. But the hands-on owner-manager won’t disappear,” says Ms Harlaftis.
FINANCIAL TIMES MONDAY JUNE 2 2008
A new economic model will foster the ability to excel
Greece managed the transition to democracy after the fall of the military dictatorship in 1974 in admirably smooth fashion, with the conservative governments of the 1970s and the socialist governments of the 1980s making income redistribution a priority. But while political stability improved, Greece saw two decades of poor economic performance. Inflation was much higher and GDP growth lower than the European Union average. The political cycle was largely to blame, producing high fiscal deficits and debt. A shift in the conduct of economic policy took place in the mid-1990s, following the government’s decision to join the single currency by the end of the decade. Since then, fiscal targets have been pursued in a systematic way, while liberalisation and privatisation of banking and public enterprises have remained high on the political agenda. Since adopting the euro in 2001, Greece has outperformed its partners in terms of growth. Growth has been led by consumption and investment following the sharp fall in interest rates that accompanied euro entry; by a “feel-good” factor due to stability implied by joining the currency; by large public-sector investment projects partly financed by the EU; and by synergies between macro-economic stabilisation and the liberalisation of banking. As a result, Greece’s per capita income per head in 2008 is estimated by Eurostat to have reached 90 per cent of the eurozone level. Yet problems remain. In spite of strong growth rates, the unemployment ratio is high. The current account deficit is at record levels while the export ratio is the smallest in the EU. The ageing population and the retirement of baby boomers is likely to create problems for the social security system after 2015, and raises questions about the long-term sustainability of public finances. Lack of competition and restrictive practices in domestic goods and services markets facilitate high profit margins and prices. The tax system is complicated and contains many exemptions, contributing to low revenue growth and income inequality. Red tape discourages entrepreneurship, innovation welfare state’s efficiency is clearly limited as the reduction of the poverty ratio after social transfers is one of the lowest in the EU. If these are not tackled, our prospects will worsen and discontent will grow. Our economy needs a new model. Growth should become more export-led, because Greece is a small economy and cannot continue to depend on domestic consumption and investment. It needs a more competitive economy underpinned by an efficient welfare state. International experience shows that, for small economies, there are three catalysts for success in a demanding global environment. First, investment in human capital; second, an optimal balance between markets and the state, flexibility and social protection; and third, strong institutions and an efficient government. Greece is in a position to excel. It has a comparative advantage in tourism, shipping and services. Its labour force is skilled and educated. There is no lack of capital and entrepreneurship. It is close to countries with large growth potential that have become, or aspire to become, EU members. It can become an energy hub and a business centre in south-east Europe, to be used as a springboard by multinationals. It might become the destination of retired baby-boomers. Its biggest challenge is to turn problems into opportunities. If it cuts red tape, it can encourage entrepreneurship and innovation, attract foreign direct investment, and increase its export ratio. If state education and vocational training are reformed, and more competition is introduced in domestic product and services markets, Greece can increase employment, productivity and promote equal opportunities. If it modernises the tax system it can increase revenue, secure resources for education, health and social welfare and improve income distribution. All the more so if defence spending is reduced, perhaps through agreement with Turkey. A stronger economy, with higher productivity and employment as well as sounder government finances would minimise painful changes in the social security system. The opportunities are here. It is up to politicians and social partners to grasp them. Yannis Stournaras is Professor of Economics at Athens University.
Challenges: Yannis Stournaras and foreign direct investment. High defence spending and lack of planning and priorities in expenditure divert resources from education and healthcare and contribute to a society of unequal opportunities and a high relative poverty ratio. The
Luxury on the ocean wave
Regional rivals are ahead in the race to lure yachts, reports Diane Shugart
t costs €10,000 a day to skim the azure waters of the Aegean aboard a 33-metre luxury motoryacht like the Pollux, with wood-panelled ceilings in the lounge and indoor dining room, a whirlpool bath in the master bedroom, and touch-pad controls for everything from the television to the temperature. With cabins that can accommodate 10 people, the cost of chartering the yacht falls to €1,000 a day for each guest – still steep, but accessible not only to the superrich. Yachting and cruise tourism are growing rapidly and are the highest-earning sectors of Greece’s tourism
industry. These sectors attract 2 per cent of visitors but bring in 9 per cent of revenues, according to the tourism ministry. Brokers and owners say the advantages of yachting are flexibility in setting your own schedule, a wide diversity of destinations while at the same time enjoying all the amenities of a five-star hotel – plus the cachet of chartering a yacht. “Yachting offers freedom,” says William Lefakinis, chairman of Valef Yachts, a yacht broker participating in last month’s international yachting symposium, an annual event held on the island of Poros. “It’s about independence: you eat, drink, and go when you want, in absolute privacy.” A glance at any of the 80 mega-yachts moored along the Poros waterfront highlights the possibilities of a Greek holiday offshore. With hundreds of islands and a
15,000km coastline punctured with fishing harbours and coves that can be reached only by sea, the country is an ideal yachting destination. Yet it has been slow to lure yachts from the western Mediterranean and lags behind both Croatia and
‘Russians ask for twoyearold boats but you can’t make such an investment so you can rent it for 10 days a year’
Turkey in numbers and quality of marinas. Greece has more than 1,000 ports and harbours but fewer than 30 marinas. Most are state-owned and offer limited services. While a few private marinas have customer reception and service facilities that
rival any in the Mediterranean, owners and captains may struggle in high season to find adequate fuel and water supplies in the Aegean islands. Apart from the lack of infrastructure, an oppressive bureaucracy and inadequate training for crews also raise obstacles to the development of Greek yachting. According to Greek regulations, crews are required on boats more than 20 metres in length, while the European Union limit is 24 metres. Greek law also requires that Greek-flag yachts have Greek captains. But changes are underway, according to brokers. More than twice as many boats took part this year in the Poros symposium. The number of high-quality boats available for charter is increasing, while yachts are being operated to higher standards. “I think owners are becoming more professional. And
crews have improved, though not yet to the standards you find abroad,” says Julie Kourouvanis of Seascape, a Greece-based charterer. Brokers say the yachting sector needs another round of government incentives in order to become competitive with Turkey and the western Mediterranean. They point to a previous development law that promoted yachting tourism in the early 1990s by offering incentives for owners to replace their older boats with new ones. Yet both the number of yachts registered in Greece and the number of charters has increased significantly since the 2004 Athens Olympics, according to tourism officials. The Hellenic Yacht Registry, which currently licenses 6,000 yachts, has seen 20 per cent annual growth since the Games, covering all sizes of yacht in all categories. The number of charters has also increased by about 20 per cent yearly over the past three years, according to the Hellenic Professional Yacht Owners Association. But as chartering sailboats and yachts becomes a mainstream holiday option, the high-end market has become still more demanding, with clients requiring extras such as jet-ski
Ideal destination: Greece’s islands and coastline make it attractive to yacht owners equipment and even helicopters. “Americans were once 90 per cent of the yachting business,” says Christos Afroudakis, managing director of Afroudakis Yachting and president of the Hellenic Yacht Brokers Association. Russians, and to a smaller extent Arabs, have become the main market for Greek yacht charters, he says. But their insistence on big stateof-the-art boats puts pressure on Greek owners’ resources. “Russians often ask for
boats that are no more than two years old – and only in high season,” Mr Afroudakis says. “But you can’t really make such an investment in a yacht just so you can rent it for 10 days a year to Russian clients.”
Island named after water learns to live with constant shortages
Foreign tourists visiting Hydra are impressed by the islanders’ level of environmental awareness. Hotels ask visitors to forego daily changes of towels and use water sparingly. A small, rocky island, it attracts visitors yearround. Art buffs attend summer shows at galleries. Cruise ships call daily at the port. In winter it is a popular weekend resort for Athenians. Hydra gets its name from the classical Greek word for water – “ydor”. But the ancient wells or springs have dried up, so the island is supplied by tanker vessels that deliver up to 500,000 cubic metres of water yearly from Ayios Yorgios on the nearby Peloponnese coast. Many small islands face a similar problem, says Panayota Marangou of the Worldwide Fund for Nature’s Athens branch. “The islands have limited water resources and the fact that they’re tourist destinations means demand is highest during the driest period of the year. Locally, the problem can be acute, no matter how much it’s rained,” she says. Hydra’s water consumption is only for residential use. There is no agriculture on the island, and even keeping flowers in pots is discouraged. Residents drink only bottled water. The construction of swimming pools is banned. The price of water on Hydra has reached €2 per cu m, and is set to rise. Some houses have rainwater cisterns that provide an invaluable backup. “Our cistern is as big as a room. We use the water for showers and cooking so we avoid paying huge water bills,” says Pavlina Proteou, an Athenian journalist with a family house on Hydra. Mayor Konstantinos Anastasopoulos says several projects are underway to address the shortage. “We can’t really take any additional measures to limit consumption,” he says. One project is a new water source on a mountainside above the town. The second is to build a rainwater reservoir at Metohi on the mainland. Islanders believe desalination will eventually solve the water problem. Like several small islands, Hydra already has a desalination plant. But Public Power Corporation, the state utility, has not connected the plant because its network is overloaded. Until capacity is built, Hydra’s cisterns will be as important as ever.
2006 2007 2008* 214 228 Total GDP (€bn) 235 Total GDP ($bn) 268.7 312.9 361.5 Real GDP growth (annual % change) 4.2 4.0 2.8 National government GDP per head ($PPP) 27,714 29,563 31,237 Exchange rate: Council of Ministers responsible Inflation (annual % change in CPI) 3.3 3.0 3.9 2007 average €1=$1.370 to the legislature, headed by a Agricultural output (annual % change) -5.6 0.4 0.4 2008 latest €1=$1.565 prime minister appointed by the 11.4 3.2 Industrial production (annual % change) 3.2 Population: 11.2m (2007 estimate) president on the basis of ability to gain the support of parliament. 8.9 Unemployment rate (average %) 8.3 7.9 Main cities & population (2001) A New Democracy government 9.7 Money supply M2 (annual % change) 3.75m Athens was elected on September 16 2007 with Costas Karamanlis as Foreign exchange reserves ($bn) 2.85 3.67 1.04m Thessaloniki prime minister Government expenditure (% of GDP) 39.1 38.6 39.7 0.33m Patras Budget balance (% of GDP) -2.4 -2.8 -2.6 Constitution National elections results Current account balance ($bn) -29.7 -44.2 -49.6 Official name Sep 2007 No. of seats Exports of goods ($bn) Hellenic Republic 20.3 23.9 29.8 -64.6 -80.8 -99.7 New Democracy 152 Imports of goods ($bn) Legal system -44.3 -56.9 Trade balance ($bn) -69.8 Panhellenic Socialist Based on the constitution of 1975 Movement * forecast 102 National legislature Bl a c k Sea BULGARIA Greek Communist Party 22 MACEDONIA TURKEY Unicameral Vouli (parliament) of 300 TH RACE members, which is directly elected by Coalition of the Radical Left 14 Kavalla Komotini a form of proportional representation Popular Orthodox Rally ALBANIA Thessaloniki 10 Thasos for a four-year term, although early Total 300 dissolution is possible Area: 131,957 sq km Language: Greek Currency: Euro (€) Electoral system Universal direct suffrage over the age of 18 years
National elections Sovereign credit September 16 2007(legislative) Moody’s February 2005 (presidential). The next legislative election is due by Fitch IBCA September 2011; the next presidential Standard & Poor’s election by February 2010 Main trading partners (share of total trade to world 2006) Germany Italy Bulgaria Russia UK France 0
A1 A A
Cephalonia Zante Ionian Sea
Ae gea n Skiros Sea Oinoussa
Samos Piraeus Poros Cyclades Hydra M ir toa n Sea Sea of C re te
se ne ca de Do
Exports Imports 2 4 6 8 10 12 14
Sources: Economist Intelligence Unit; IMF