Greece VAT rise hurts as bailout terms start to bite

The tax hike will affect not only the cost of restaurant meals, processed food in shops and even salt, but also taxi fares and private school fees.
The tax hike will affect not only the cost of restaurant meals, processed food in shops and even salt, but also taxi fares and private school fees.PHOTO: REUTERS

ATHENS (REUTERS) - To tourists wandering the narrow streets of central Athens, 20 cents on the price of souvlaki - a Greek favourite of grilled meat on a skewer - may not seem much. But for waiter Stavros Giokas, Monday's jump in value-added tax is a big worry.

The VAT rise, demanded by Greece's lenders in return for a rescue deal, forced the restaurant where Giokas works to push up the price of souvlaki - wrapped in flatbread with salad and drizzled in tzatziki garlic yogurt - to 2.40 euros (S$3.55) from 2.20.

While a bargain for well-to-do northern European visitors, for Greeks worn down by years of austerity, the price increase is one more reason not to eat out.

"People are counting every cent, not just for souvlakis," Giokas said as he waited for customers, surrounded by empty tables decked in yellow and green tablecloths.

Some big, foreign-owned firms will absorb the rise in VAT on processed food and public transport from 13 to 23 per cent without passing it on to customers. Other businesses may simply try to dodge paying the tax on some of their sales, a widespread practice that has contributed to Greece's economic problems.

But for many of those that do pay, there may be no other option than to pass on the rise to clients. "We can't absorb the cost. Everything is getting more expensive: tomatoes, onions, tzatziki," Giokas said.

The tax hike will affect not only the cost of restaurant meals, processed food in shops and even salt, but also taxi fares and private school fees.

VAT jumped less than a week after the rise was approved in parliament as the leftist government of Prime Minister Alexis Tsipras tries to show other euro zone countries he is serious about reforms required to start talks on an 86 billion euro bailout deal that Greece needs to stay afloat.

But across the country, workers, pensioners and economists alike worried about the impact of the increase on a population suffering from unemployment of over 25 per cent and on an economy that was already forecast to contract this year. "When everything costs me 10 per cent more, isn't my pension's buying power much weaker? It's like a pension cut,"65-year-old Nikos Koulopoulos said.

Economists say Greeks have little choice but to pay up as the VAT rise largely affects goods they cannot live without.

"It's definitely a recessionary measure," said Nick Magginas at National Bank. "But there are good chances it will bring in the expected revenues because a big part of the adjustment applies to basic goods where demand is not elastic."

Several major international retailers which operate in Greece, including Germany's Lidl supermarket chain, put out advertisements on their websites saying they would not pass on the VAT rise to clients.

But others said they could simply not do otherwise.

I believe the VAT increase will eventually be rolled over to the final customer, we are already working on marginal profits," Sklavenitis supermarket spokeswoman Melina Varoutsikou said.

The chain, one of the biggest in Greece, was in the process of changing the prices, she said, adding that as a result of any increase in prices there could be a slight drop in demand.

Overall, large businesses should be able to absorb the rise much better than small ones, said Antonis Diapoulis, analyst at Alpha Finance. "Lots of smaller businesses, both restaurants and in retail, may try to go to the black market and won't give receipts whenever they can help it," he said. "Overall the impact will be negative. That's for sure."

In Athens, taxi drivers were very worried. "People have no money to pay for cabs because of the crisis. Now with the increase, it will be even worse... in turn, I will not be able to buy things," said 49-year-old Tassos Dritsas, who has been driving taxis since 1988.

In one coffee shop, the freddo cappuccino - an iced cappuccino that is a favourite of many Greeks - had increased from 1.60 euros to 1.80. "Coffee is still a product that the people will buy, it's a way of living for the Greeks.

The VAT increase won't be huge. In our case, for the final customer, the increase will amount to 15-20 cents per product," said Kostas Stavropoulos, 24, who had delivered coffee to employees of a bank that had just re-opened after lenders were shut for three weeks during the crisis.

But for him the question goes way beyond the iced coffees.

"Following the VAT increase, people should reconsider the way they live. They have to change their daily routine and cut from all ends."