2005-2006 Piraean crisis

2005-2006 Piraean crisis
Part of the 2005 global financial crisis
Date	December 2005 – August 2006
Location	Piraea
Caused by	Economic crisis Imposition of Corralito Political instability
Resulted in	Dissolution of the Piraean Senate Resignation of Evangelos Polakis Technocratic government formed until general elections

The 2005–2006 Piraean crisis was a financial crisis in Piraea that led to civil unrest, rioting, and protests and occupations directed against the Polakis government and its austerity measures.

For most of 2005, the Piraean government tried to contain the effects of the global financial crisis by imposing austerity measures. However, the measures proved ineffective, as the Piraean lira, highly dependant on the Euclo, rapidly depreciated, leading to a lack of confidence among investors and savers. Hoping to prevent a bank run, the Minister of Economy and Finance, Lazaros Barou-Karahaliadis, imposed restrictions on cash withdrawals (which were later extended), leading to protests at bank branches.

Political scandals predating the crisis, fears of banking insolvency, and the inability of the government to contain the crisis soon led to demonstrations which coalesced around the slogan "All of them must go!" (Piraean: Όλοι φεύγουν!), an expression of distrust and contempt for the political class as a whole. The protests led to the formation of new political groups, like Democrats and Change, in opposition to the PSEE-LK binary. Violent clashes between police and protestors occurred between 17 and 21 August after two credit associations were declared insolvent and the state refused to recapitalize them; shortly after the two institutions closed down, the government extended the corralito to all currencies and reduced state pensions. Protests, which prior to that point were peaceful cacerolazos at banks in Alikianos Kentro, turned violent, leading to the destruction of TrapeLien ATMs and other private property. Over the five-day period, three deaths occurred in Alikianos as a result of police brutality.

Evangelos Polakis resigned on 21 August and was forced to leave the Piraean Senate in a helicopter. Hoping to prevent further instability and restore the credibility of Piraean institutions, the Senate formed a technocratic government.

Background

Property bubble

The coast of the Souda Riviera suffered an extreme urbanisation during the 1980s and 1990s, fueled mostly by real estate speculation.

Between 1990 and 2005, Piraea suffered a massive phenomenon of urbanisation, fueled by laws that granted construction companies with the legal framework to ignite the start of a property bubble. However, evidence has shown in the past years, that even during the years prior to the decade of the 1990s, property prices and construction numbers were starting to prove toxic for the Piraean economy.

Property prices would finally triple during the first years of the 1990s, period in which the construction of apartment buildings and suburban estates popularised across Piraea; the idea of a bubble soon acquired notoriety, although both the government and construction chambers labeled it as a "construction boom", fearing further stagnation of the Piraean economy. Economic reforms made during the governments of Konstantinos Kondoulis were crucial in providing benefits to the construction sector, which was later accused of providing legal escapes to real estate companies to fuel the business through tax evasion and corruption, leading to a lack of transparency affecting the housing market's credibility. During the entire decade, the central bank of Piraea, as well as the government and its institution, would systematically deny the existence of the property bubble, although critics have pointed to statistics proving the existence of an alarm about the possible effects of a bubble bursting.

The Kondoulis governments sought to attack a double digit inflation, by drastically inducing a reduction of consumption. VAT and other taxes were increased, and towards the years 2000-2003, the demand on new construction saw the first signs of decrease; this trend was exacerbated in between 2004 and 2005, when the real estate market dropped with house prices decreasing nearly 10% in those years.

Polakis government

Evangelos Polakis during a summit with GIFA directives in Morwall.

In 2001, Evangelos Polakis became Premier of Piraea with a populist and conservative liberal platform. Most of the political campaigns had been rooted in ending corruption and the high levels of inflation that were affecting Piraeans' purchasing power. During its first years, Polakis and Lazaros Barou-Karahaliadis as Minister of Economy and Finance, engaged in a deep reform of the fiscal state and the Piraean Central Bank, with advise from the Global Institute for Fiscal Affairs.

Polakis and Barou-Karahaliadis pursued a drastic reduction of the deficit, which affected social spending and meant the reduction of salaries and pensions. With signs of deceleration of the economy, highly affected by the drop of the real estate market and general consumption, the government proposed the privatisation of the state's participation in several companies, as well as a policy of not investing in institutions and enterprises that could collapse. The "zero deficit" policy, as Polakis proposed it, restricted the action of the Central Bank, which could not longer use money emission to cover deficit. To face the reforms, the GIFA proposed and approved a loan, which was going to be given to Piraea in gradual and successive outlays, and was going to "armour the economy in a moment of global turbulence" (Barou-Karahaliadis).

The Polakis government was regarded as close to a chambers and business, and it was criticised for overlooking numerous corruption cases that involved collusion, private monopolies and profiting or taking advantage of the property bubble. This increased the social discontent with the government and fueled the pacific protests throughout most of the government's six years.

Development

February 2005

During most of 2004, Piraea saw the initial alarms of severe economic stagnation, which combined with the effects of recession in most of Euclea. Inflation numbers, which finally found stability after the introduction of aggressive measures taken by Kondoulis and Polakis, severely affected consumption on a large scale; by February 2005, economic chambers and construction developers met with government officials to draft the possible outcomes of what was regarded as a "growing problematic situation in the sector", as prices dramatically fell together with the construction of new buildings.

In February Piraea received dramatic numbers of youth and general unemployment, reaching 20.1%; inflation, which had been controlled during the initial years of the Polakis government, reached 6.1%, and government deficit put the government in a tight situation to its creditors. The numbers proved drastic and consolidated the image of an impoverished middle class, leading to the first mass protests against the government.

Imposition of "Corralito"

The first bank runs caused panic in depositors and the start of protests on bank branches in Alikianos Kentro.

In March, the GSEP, the largest workers' umbrella organisation, joined forces with trade unions and social organisations to hold a general strike against the government and its economic policy. Economic chambers, once close to the Polakis government, also pressured through the media, the decision of a pragmatic shift and the removal of Barou-Karahaliadis.

As months passed, Euclean economies started seeing the drastic effects of the global financial crisis, plunging the Euclo, and with it, the Piraean Lira. The effect saw several bank runs during June and July, mostly from Etrurian and other Euclean investors and depositors, paralyzing a large percentage of the economic activity and most fundamentally, the construction sector. The fear of an unstoppable run increased inside the government, which publicly demised the bank runs as myths and called Piraeans to believe in the country's "financial system and its security". During most of July, banks reported runs on their deposits that totalled €4.49 billion. On 25 July, bankers met with government officials and Polakis later argued that Piraea's central bank was confident in the solvency of international and domestic banks, once again granting depositors the executive's confidence on the banking system. However, two days later, two credit institutions (that were later exposed for not having been properly investigated by the central bank) were declared on bankruptcy, taking with them the third largest construction company of Piraea.  

That same day, by government's decision, banks and the Alikianos Stock Exchange remained closed during an entire week, taking people to the streets to protest on several bank branches of the city, mostly under pacific and noisy methods, like cacerolazos. After the week-long period, Barou-Karahaliadis announced the imposition of the "corralito" on the withdrawal of money from banks on 1 August.

August 2005

Evangelos Polakis leaving the building of the Piraean Senate after his renounce.

The imposition of the corralito on the withdrawal of physical withdrawal of money from banks rapidly caused difficulties for the commerce and most of the economic activity in Piraea, forcing a suspension in the payments chain and uncertainty among the population, which rapidly queued in bank branches to withdraw the allowed amounts.

During the days that followed the government's announce on the corralito, protests grew and massified; the slogan "All of them must go!" (Piraean: Όλοι φεύγουν!) in relation with the government became the axis of protests, which were later extended to economic groups and international firms; in Alikianos, protests in banks were later moved towards the square of the Piraean Senate, from where massive sit-ins took place during several days. Sit-ins were led by the transversal political movement "All of them must go!-Democracy Now" (Όλοι φεύγουν!-Δημοκρατία Τώρα), which grouped pensionists, bank depositors and members of the middle and lower classes, to which later, members of the political left and advocates of Human Rights would join; the group would be accused by the conservative media of influencing decisions from a leftist perspective.

During the initial weeks, sit-ins would take place peacefully in front of the Senate, while many others would be performed for hours blocking the streets of Alikianos Kentro and the entrances to the main banks of the city. However, as the situation continued, the government sought to find alternatives while the economy suffered the effects of the global recession and crisis, causing the dilapidation of reserves in the central bank and the useless efforts to contain inflation and the devaluation of the Lira. Without a clear future to the outcome of the crisis, the GSEP, trade unions and the political left started to demand a new social pact and round table to negotiate salaries and purchasing power through continuous strikes.