Greek Businesses Fear Possible Return to Drachma

For the last couple of weeks, the phone at Tasos Ioannidis’s five-star hotel on the breezy island of Mykonos has been ringing steadily, but not with the types of inquiries he wants to field.

European Bank Note
Sabine Scheckel | Image Bank | Getty Images
European Bank Note

“People are saying they don’t want to confirm a stay or make deposits,” said Mr. Ioannidis, who owns the luxurious Belvedere Hotel, perched on a cliff over the Aegean Sea. “They are afraid of what could happen to their money if Greece leaves the euro and returns to the drachma.”

Worries that Greece might default on its debts or even leave Europe’s currency union have deepened since May 6, when Greeks voted in shocking numbers for a left-wing party willing to tear up Greece’s $170 billion international bailout agreement. These days, even though 80 percent of Greeks say they want to stay with the euro, talk of “drachmageddon” can be heard in conversations all around Athens — in executive suites, at mom-and-pop shops and even in nightclubs.

“A return to the drachma would be a nightmare,” said Mr. Ioannidis, whose bookings began to trail off a few months ago and slumped badly after the election. “It would create a panic for businesses and also for people wanting to do business with Greece.”

Any departure from the euro, if it did occur, would not come quickly, even if a new government repudiates Greece’s bailout terms; orchestrating the exit would be legally complicated and lengthy. European leaders may also move to prevent a Greek default or exit at the 11th hour, considering the almost unending uncertainties.

But these days, few people are taking chances.

Big tourism operators like TUI of Germany and Kuoni of Britain are demanding the addition of so-called drachma clauses to contracts with Greek hoteliers should the euro no longer be in use here. British newspapers are filled with advice columns for travelers worried about the wisdom of planning a vacation in Greece, or even Portugal and Spain, should the euro crisis worsen. Large multinational companies like Vodafone Group, Reckitt Benckiser and Diageo have taken to sweeping cash every day from euro accounts back to Britain to limit their exposure.

But coming up with a Plan B is proving difficult for Greek businesses, especially smaller ones. There are so many unknowns involved that many of them cannot even conceive of how they would cope. Economists say the drachma would be devalued by an estimated 50 to 70 percent compared with the euro.

“How do you prepare for the apocalypse?” asked Dimitrios Manolis, the owner of AlfaSolid, a small company that makes design software. He has had to whittle his staff of six engineers down to two, as firms he did business with have collapsed amid a credit squeeze. “If Greece leaves the euro, there will be no work for me,” he said.

Dimitris Mamoglu, the owner of a fine-jewelry store near Syntagma Square, said small businesses had “absolutely no plans” to handle a return to the drachma. “Nobody can calculate how much money or time it would take to change over,” he said.

Tens of thousands of Greek businesses could collapse from one day to the next, said Constantine Mihalos, the president of the Athens Chamber of Commerce and Industry. Around 85 percent of Greek companies employ fewer than 10 people, and many are already near bankruptcy as the Greek economy nose-dives and bank credit dries up.

With a devalued currency, inflation would rise rapidly, and Greek companies would struggle to pay the euro-denominated bills of their suppliers. Trade with other countries would slow sharply for a while, as suppliers halted deliveries, further crippling Greek businesses that depend heavily on imports.

Even large Greek exporters that might benefit from a devalued currency are opposed to a return to the drachma, fearing damage to the country’s image as a place to do business.

The troubled Greek banking system, which is already running on fumes, would face a serious run as depositors pulled their funds. An estimated 250 billion euros, or about $315 billion, has already left Greek banks since the crisis first broke open three years ago. In the days after this month’s elections, more than 700 million euros, worth about $890 million, were pulled, a pattern that Greek bankers expect to continue until greater political and economic certainty is restored.

The International Monetary Fund estimates that a Greek exit from the euro would lop more than 10 percent from Greece’s gross domestic product for at least the first year after a return to the drachma.

After that, the thinking goes, a new dawn would break, as the weakened Greek currency lowers the cost of Greek labor and products like olive oil. As was the case in Argentina, businesses and consumers in other countries would eventually start buying Greek goods and services once they improved in value.

That may help the tourism industry as vacationers come seeking bargains. But hopes of a broader export-led recovery may be little more than a chimera, said Mr. Mihalos, the chamber of commerce president.

Aside from shipbuilding, most of Greece’s industrial base has eroded in the 30 years since the government nationalized large areas of industry. Wealth-generating businesses diminished, and tens of thousands of laid-off workers were absorbed by the state to reduce unemployment .

Today, Greek exports of manufactured products account for only 10 percent of gross domestic product, compared with a 30 percent average for the rest of the euro zone. In addition, Greece’s adoption of the euro hastened a steady shift away from agricultural production. Today, Greece imports nearly 40 percent of its food, most of its medicine and almost all of its oil and natural gas, a situation that may lead to shortages if international suppliers halt business for a period.

Should that happen, observers say Greece may need to prepare for civil unrest.

“If we go to the worst case, and I pray that we don’t, it’s going to be a complete Greek tragedy before normalcy is restored,” Mr. Mihalos said.