EMU membership on track

Criteria, however, may cause central bank woes

Greece appears set to become the newest member of the European Monetary Union on Jan. 1, 2001 when the next wave of members are accepted.

According to a recent Organization for Economic Co-operation and Development report, Greece is on target to meet convergence criteria relating to budget deficits, debt, inflation, interest and exchange rates. Nonetheless, the OECD expects the government will maintain a tight fiscal policy this year with an emphasis on cutting its deficit.

On the other hand, monetary policy must be relaxed to harmonize the wide differential between short-term interest rates in Greece and the EMU.

This puts Greece’s central bank in a dilemma: While it is expected to bring interest rates down to EMU levels over the next year, its monetary policy must support disinflation, meaning high interest rates.

Optimism about Greece’s entry into the EMU has put the country in favourable light with investors. Although the country is classified as an emerging market, many investors have generally accepted the fact this status will change in less than a year. The equity market is benefiting from the improving economy, earnings upgrades, increasing corporate activity and strong participation by domestic investors. As of early December, the Greek market was up almost 42% in U.S. dollars for the year on the MSCI Index. In as much as the strong equity markets are good for investors, there is some degree of concern about the high rate of participation and leveraging by unsophisticated domestic investors in a largely overstretched market.

Structural reforms

Greece’s convergence program has targeted a number of structural and institutional reforms, including a revamped taxation system, elimination of monetary financing of the country’s budget, liberalization of short-term capital movements, development of the foreign exchange market, removal of administrative constraints to public investment projects and increased privatization initiatives.

To promote development and attract foreign investments, special incentives based on business location and industry type are being granted to private investors under the country’s development laws. Businesses in less-developed regions are favoured, as are industries deemed to be important to the national economy. Incentives come in the form of tax relief, interest rate subsidies, cash grants and increased depreciation rates. Both local and foreign investors enjoy equal treatment under the development laws. Foreign direct investment in Greece has averaged about US$1 billion annually over the past five years.

Capital movement is unrestricted in Greece and foreigners can freely invest in any listed or unlisted security on the Athens Stock Exchange, other than bank shares which are subject to certain limits that must be approved by the country’s central bank. Investors can repatriate their initial capital, as well as capital gains, interest and dividends. A flat 35% tax is applied to both retained and distributed earnings but capital gains are tax-free.

Over the past decade, the Greek equity markets have benefited from substantial structural reforms. New laws governing the ASE were enacted in 1988 and revised in 1991 and 1995. Brokerage firms were allowed to become full members of the exchange, an independent securities depository was established, legislation to facilitate remote membership and an automated trading system based on cross-matching of orders was installed. Securities currently settle on the ASE on trade date plus three days, similar to North American markets.

Greece has two stock exchanges – the ASE and the Thessaloniki Stock Exchange. The ASE is the main exchange with a total of 309 listed companies as of Sept. 30 and a market capitalization of about US$223 billion.

Regional exchange

The TSE was established as a regional exchange in 1995 in collaboration with the ASE, with the aim of developing the capital markets in northern Greece, attract new listings from companies in the Balkan states, and court foreigners who want to invest in the region but have trouble dealing with laws, regulations and currency rates.

Greece is ideally located for investors targeting the Balkan markets and is within easy reach of Asia, Africa and the Middle East. In fact, Greek investors see the Balkan region as a huge growth area. Since the beginning of the 1990s, 3,000 Greek companies have set up operations across the region, mainly through joint ventures and partnerships. In 1998, the ASE signed a memorandum of understanding with the stock exchanges of Bulgaria and Romania, with the objective of co-operating in the areas of listing and electronic trading.

Politically, Greece has maintained good relationships with the Balkan States. Its influence and close ties with southeast Europe positions it to become a centre of economic gravity in the region.

Greece’s membership in the European Union and other major international institutions puts it in better light than most of its emerging market counterparts.

Its impending membership in the EMU adds credibility to a market traditionally dogged by political uncertainty. Greece will make its formal application for EMU membership in March and should receive approval sometime in June. For now, it appears to be on track for membership.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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