By
with contributions from Elis Kiss
 on June 27, 2011

Just what retailers and brands need: more uncertainty.

Global stock markets are bracing themselves for the next act in the ongoing Greek financial drama as the European Union and Greece debate a financial bailout package. Failure to agree to terms would result in a default on the country’s sovereign debt, which could see European economies spiral yet again into recession — and drag the rest of the world’s along with them. Fear of the impact of Greece’s financial crisis, tempered by occasional flashes of optimism about an EU-Greek deal, wreaked havoc with stock markets worldwide last week, depressing European and North American equities while sparing those in Asia.

The Greece situation appeared to ease a bit Friday when European leaders reportedly agreed to a second large bailout of the country provided the Greek parliament OKs a package of austerity measures this week. If it does, the EU and the International Monetary Fund would pump 12 billion euros ($17 billion) of emergency aid into the Greek economy while developing a second rescue package that would be finalized at a meeting of EU finance ministers on July 3.

So far consumers in Europe are shrugging off the crisis in Greece and continuing to shop, while those in the U.S. are barely registering it as they focus on their own fears over continued high unemployment, rising government debt and sputtering economic growth. Luxury products continue to perform the best, while the mass market and some fast-fashion players are struggling since their consumers are the ones most impacted by higher gasoline prices and unemployment.

“Consumer confidence is very low and has been for some time now,” said Richard Dodd, a spokesman for the British Retail Consortium. “People are uncertain about their own personal finances and job prospects and that has a more direct impact on their spending. If Greece defaults, it will be yet another factor that creates downward pressure on the consumer.”

There is always the risk a meltdown in Greece could even hobble the newfound momentum in the luxury goods sector.

“The luxury sector may be affected by a less favorable feel-good factor, but at this stage the Greek crisis is having no impact on luxury goods consumption,” said Pierre Lamelin, luxury goods analyst at Cheuvreux in Paris.

He added that if there were a drastic turn of events — comparable to the financial meltdown in the post-Lehman Brothers collapse — luxury goods consumption would certainly be affected. “If we start to see seriously declining real estate and equity markets or more taxes — especially for the rich — then it may have an impact. But right now it’s difficult to quantify.”

Guy Salter, deputy chairman of Walpole, the association of British luxury brands, said it would take a serious crisis to slow the luxury sector’s momentum.

“Luxury has just come out of the biggest crisis it has ever faced, there has been a big rebound, and this year has been extremely healthy,” he said. “There is a resilience built into the luxury business model, and record growth from the Chinese who do their buying in Europe. Yes, the situation in Greece is a worry, but we’ve proven we can weather it.”

Still, the ongoing attention to the situation in Greece has been among the factors that recently have interrupted the upward movement of stocks, a critical component of the recent propensity to spend among the affluent.

The Athens Stock Exchange General Index Friday fell 0.7 percent to 1,232.60, elevating its 2011 decline to 43.8 percent. After a 1 percent decline last week, the CAC 40 in Paris is off 0.5 percent for the year, at 3,784.80. The U.K. has had its own austerity program to deal with, contributing to its 3.4 percent year-to-date decline, to 5,697.15, as well as its 0.3 percent pullback last week. Frankfurt’s DAX remains up 3 percent for the year, at 7,121.38, despite a 0.6 percent drop last week.

Echoes from the Greek crisis have been heard in the U.S. as it’s confronted its own deficit and attempted, unsuccessfully so far, to devise a budget capable of passing Congress and gaining President Obama’s approval. The European debt situation has weighed heavily on U.S. markets, contributing to the Dow Jones Industrial Average’s drop below 12,000 and even the S&P Retail Index’s 7.1 percent retreat from the all-time high of 552.11 set as recently as May 13.

Last week, the Dow dropped 0.6 percent to 11,934.58 while the S&P Retail Index rose 2.1 percent to 513.12 despite declines of 1 percent and 1.4 percent on Friday, as optimism about a Greek bailout was supplanted by renewed concerns. Despite a downward drift over the last six weeks, they remain up 3.1 percent and 1.1 percent, respectively, for the year.

Asian markets rallied last week but, haunted by the damage of the Japanese earthquake and tsunami in March and fears about the strength of China’s economy, remain down for the year. The Nikkei 225 in Tokyo is down 5.4 percent for the year, at 9,678.71, despite last week’s 3.5 percent increase, and Hong Kong’s increasingly high-profile Hang Seng Index is down 3.8 percent in 2011, at 22,171.95, even after its 2.2 percent rally last week.

Looking ahead, industry observers say if Europe comes to the rescue with a second Greek bailout package — and it likely will — then the short-term impact of the crisis in the U.K. and the euro zone will be limited and investors are likely to breathe a sigh of relief, regardless of other pressures bearing down on their nations’ economies. However, if they let Greece default, it would kick Europe back into recession.

“If Greece survives this crisis, the lack of consumer confidence will be less significant in the U.K. than in the EU, because we are slightly removed — both geographically and because it is not our currency. Our European friends will be more affected than we will be,” said Mark O’Hanlon, a manager at Kurt Salmon, the global management consultancy.

“If Greece fails then all bets are off. The knock-on effect on the banks and other City institutions could be as much as 336 billion pounds, or $538 billion. This is the equivalent of a quarter of our national GDP [gross domestic product], or 14,640 pounds, or $23,424, for every family in the U.K.,” he added.

“This would take us back into recession and demand would take a very long time to recover. Don’t forget the last time we had the recession we didn’t have the [U.K. government austerity measures] to deal with at the same time. It is in our interest to rescue Greece,” he said.

Daniel Harris of H20 Markets in London said a Greek default would be so detrimental to the European economy it is unlikely the EU would allow it to happen.

“Gross domestic product in Europe was 0.8 percent in the first quarter. However, growth in Europe has been slow since then due to higher oil prices, worries about global economic prospects and supply chain disruption in Japan, with the latter two factors affecting Germany, the export-led economy. Thus, letting Greece fail to pay legal obligations would have a significant impact on the European economy,” he said.

So far, consumers in Europe and the U.K. haven’t let the crisis in Greece weigh on them.

“Consumers have become immune to the shock of economic meltdown. They’ve been fed a diet of financial Armageddon for a while now, but what they are really worried about is their own personal, micro-economy,” said George Wallace, chief executive officer of MHE Retail, the European retail consultancy. “A meltdown in Greece won’t stop a consumer in Oxford Circus from buying a dress.”

One Paris-based analyst who spoke on condition of anonymity said,“If the crisis can be contained to Greece, then its impact will be limited to Greece. The issue is whether it will spread to other countries like Spain. If that happens, it will cause uncertainty and fear, and consumers will most certainly be tightening their belts going forward.”

The Greeks, of course, have a different tale to tell. In Athens, the once-bustling commercial area between Syntagma Square and Monastiraki is suffering: The square itself is now the site of daily protests against government austerity measures and local shop owners are laying off staff, or shutting down businesses.

Over the past two years, 30 percent of high-street retail stores across the country have closed.

“The recession has hit luxury and premium brands particularly hard, but the low end of the market has also been affected,” said Vassilis Masselos, ceo of the leading Greek lingerie brand Nota and president of the Hellenic Fashion Industry Association.

“Clothing is not a primary need, and most consumers have considerable stock in their wardrobes. At the same time, consumers are far less responsive to offers and promotions, because everybody in Greece is scared of what the future will bring,” he added.

According to figures from the Hellenic Statistical Authority, the number of retail jobs fell by 2.8 percent in the first four months of this year. Overall unemployment in Greece is currently at 15.9 percent.

Meanwhile, taxes are on the rise: Finance minister Evangelos Venizelos recently announced the tax-free threshold would fall to 8,000 euros, or $11,360, from 12,000 euros, or $17,040, while the self-employed will have to pay a new tax of about 300 euros, or $426, per year.

All figures have been calculated at current exchange.

Not surprisingly, Greek consumers have become the most pessimistic in the EU, according to a report by the Foundation for Economic and Industrial Research.

“There are days in which people don’t even enter a store, the psychology has reached rock bottom,” said Irene Derou, manager and shareholder of Deros group of companies, whose portfolio of brands includes Baccarat.

“We will always sell chandeliers, because the rich will be rich, but daily life is another matter,” said Derou. “What you don’t get anymore is clients coming in to buy the extra gift for a dinner party; that’s over. People are embarrassed. There’s an element of guilt.”

However, there might be one bright light in the gloom: the shopping mall. Among the latest entries is River West, a 20,000-square-meter space in Athens that carries brands such as Adidas, Carven and Hunter.

And earlier this month, McArthurGlen unveiled its first Greek outpost, the Athens Designer Outlet. The 21,200-square-meter space near the international airport is home to 100 discount designer outlets, including Alberta Ferretti, Brooks Brothers, Guess, Moschino, Versace, Nike and Lacoste.

Julia Calabrese, ceo of McArthurGlen, told WWD the 100 million euro, or $142 million, mall that opened on June 2 is already exceeding expectations.

“It’s still in the early days, but shoppers have been coming in droves, staying several hours and bringing their children,” she said. “The Greek consumer is brand-literate and keen to buy designer goods. We think there’s a gap in the market for a designer outlet proposition here.”

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