A Greek Tragedy

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For most of his three years in power, Greek Prime Minister Costas Simitis rallied local investors, calling the country's booming stock market "a mirror of the Greek economy." But this month, on the eve of national elections, the socialist leader put his favorite slogan in the closet as he watched share prices flounder, retail investors protest and foreign brokers balk at Greek stocks. As one senior analyst at a leading U.S. investment firm puts it, "The picture is blurred. And until it clears up, I'm telling [my] clients to keep out and stay out of the Athens bourse."

Ironically, the share price plummet began on March 9, just as Simitis announced on a live television broadcast that Greece had submitted its application to become the 12th member of Economic and Monetary Union. In the 15 minutes he took to deliver that upbeat news, the Athens index fell 56.50 points. Heavyweight state companies moved in at the last half-hour of trading, buying their own stock to keep the index from crashing. But in a follow-up session, the index fell by a further 320.90 points, wiping out about $50 million in market value. Since their peak last September, some shares have dropped more than 60% in value. "I'm ruined," cried Sotiris Andoniades, one of hundreds of investors who stormed the Athens stock exchange and clashed with riot police to demand reimbursement of his lost fortune. "The government is responsible for luring us into this national game of stud poker."

Market bulls disagree, suggesting institutional investors chose the best possible moment to dispose of waning Greek portfolios. "What better time than when Greece is taking a step closer to emu?" says a high-profile Athens broker dealing with foreign investment firms. But with elections due on April 9 and one in three households invested in the market--and with 17% of the electorate saying they will vote on the basis of the stock market's performance--the government hastened to take action.

It eased margin borrowing for stock purchases, ordered state banks and companies to purchase more of their own stock, and moved to invest 20% of the public's multimillion dollar pension funds in the Athens stock market. "Such gross state meddling I haven't seen since Hong Kong intervened at the crux of the Asian crisis in 1998," says Miranda Xafa, a senior consultant for Salomon Smith Barney. Even worse, she adds, politicians cravenly capitalized on the crisis.

Last week, a five-member mission of the O.E.C.D. arrived in Athens to "advise" the government on efforts to liberalize state controls and regulate the market, which, according to the 1999 International Narcotics Control Strategy Report from the U.S. State Department's Bureau for International Narcotics and Law Enforcement Affairs, is riddled with money launderers serving Russian and Albanian drug cartels. Finance Ministry officials also indicate the latest stock market upheaval has put a freeze until November on plans by Morgan Stanley to upgrade the stock exchange from emerging to developed market status, a move that would help drive foreign funds into Greek equities. Says Stephanos Manos, the conservative former Finance Minister who charted Greece's first emu convergence plan, "It's obvious that Simitis and his socialist administration have lost face and credibility."

That may be the case among disgruntled investors, but not in Brussels, say E.U. envoys in Athens. Simitis and his ambitious reforms to yank Greece out of Balkan backwardness have won him rounds of applause by a host of E.U. leaders who up until two years ago laughed at any prospect of Greece, the poorest E.U. member state, joining EMU. A sober-sided antithesis of his erratic predecessor Andreas Papandreou, Simitis brushed ideology aside and ventured to a form of popular capitalism, which critics call champagne socialism. He devalued the drachma, tamed inflation, trimmed interest rates and utilized the stock market to sell off a host of state monopolies.

The Finance Ministry forecasts the market will rebound as the stock exchange continues to serve as the main tool of the socialists' drive to privatize state firms and sustain economic convergence in a post-EMU era. The conservative opposition claims it has similar plans. "In the long run," says Margarita Katsimi, an economic adviser, "the impact of the elections will be minimal. Both parties share almost identical views on EMU." Still, many Greeks think it would be a tragic irony if Simitis is not around when the country enters EMU, a historic feat he made possible.