Greek drama

On its hill above Athens shines the Parthenon, a 2,500-year-old marble paean to the orderly civilization of ancient Greece. Down below, modern Greece prepares in decidedly disorderly fashion for the Olympic Games, aiming to recapture some of that lost glory.

Expectations, and anxieties, have been running high in the capital with the approach of the August 13 opening of the Olympics, first staged in Greece even before the Parthenon was built. The Greeks have pined for a return to the pinnacle of Europe ever since the Roman Empire engulfed them around 150 B.C.

Another golden age of Sophocles and Aristotle may be beyond reach for this nation of 10.6 million, but Greece will gladly settle for parity with the living standards of the wealthier members of the European Union. "Achieving convergence with the rest of the EU is the big challenge," Economy and Finance Minister Giorgos Alogoskoufis tells Institutional Investor, as the chaos and cacophony of modern Greek life take place outside his unexceptional glass-and-concrete office on Synlayma Square. The honking of bumper-to-bumper traffic and the bull horns of labor protestors mix with the frenzy of Olympic preparations, while construction crews jackhammer the sidewalks and quickly pour new ones.

If Alogoskoufis makes the convergence challenge sound fresh, it's because his conservative New Democracy government, led by Prime Minister Costas Karamanlis, whose uncle and namesake once headed the government, was elected in March by a surprisingly comfortable 5 percentage point margin over the left-wing Panhellenic Socialist Movement, or Pasok, which had ruled for more than a decade.

Despite the novelty of a conservative government in Greece, neither Karamanlis nor Alogoskoufis is about to launch a Thatcherite revolution that would suddenly roll back the welfare state and extol unbridled capitalism. Greece's last conservative government, in the early 1990s, survived barely two years, because it was perceived to have moved too quickly to expand the private sector. And this time around New Democracy campaigned on a platform that rejected belt-tightening, postponed needed reforms of the pension and health systems and promised economic growth that would edge Greeks closer to median EU living standards.

But even before the government takes up the quest for convergence, it must deal with some pressing concerns inherited from Pasok. The budget deficit is large -- about 3.5 percent of GDP, more than twice as much as the Pasok government deceptively reported. "The quality of the data is not satisfactory," said the European Commission in a May report on the Greek economy. "Deficit figures in particular remain subject to potentially significant upward revisions."

The new government is also justifiably worried that, with the end of billions of dollars of Olympics-related spending on infrastructure projects, a new engine of economic growth must be found. And as eager as Alogoskoufis might be to tackle these issues, the government's foremost goal is ensuring the success of the games, which will open with some facilities completed barely two weeks beforehand. Questions about security at the Olympics are so serious that Greece is allowing armed agents from the U.S., U.K. and Israel to guard their own athletes.

Though Pasok was brought down by corruption scandals and mounting public distrust, the party did preside over an impressive transformation of what was until recently the EU's poorest nation. During the past decade Greek per capita income rose from less than two thirds of the EU norm to close to three fourths, thanks to a GDP growth rate that often outpaced those of other EU members. Over the past three years, the Greek economy, bolstered by steroid-like spending on the Olympics, has expanded an average of 3.7 percent annually, twice the EU rate.

The evidence of newly acquired wealth is especially evident in Athens and other cities, where car ownership has tripled in the past decade, residential and office towers are mushrooming, and crowded boutiques and cafés convey a lifestyle more typical of Paris or Rome. "Compared to a decade ago, Greece is a far more modern country and one that is economically integrated with Europe and international markets," says John Sitilides, executive director of the Washington-based Western Policy Center, a privately funded, nonpartisan research institute devoted to Greek and Balkan issues.

But to achieve convergence with the EU, the country will have to do even better. According to Alogoskoufis, Greece, with a GDP in 2003 of E153 billion ($173.2 billion), will need more than a decade of 5 percent average annual growth, or close to double the expected EU figure.

Trouble is, economic expansion thus far has been overly dependent on more than E6 billion in government spending for the Olympic Games, most of it over the past four years, in addition to many billions more in structural funds doled out by the EU to its neediest members. (Between 2000 and 2007 Greece is expected to have received E26 billion in cash injections.) "These two sources have been responsible for close to half our annual GDP growth over the last decade," notes Loukas Kyriakopoulos, director general of the Athens-based Foundation for Economic and Industrial Research, which is funded by the private sector and issues quarterly reports on the economy.

Olympics spending will end when the games close on August 29. And the May 1 entry of ten new members into the EU -- all except Slovenia poorer than Greece -- means the Greeks will be receiving less in EU structural funds, perhaps half the current annual totals, beginning in 2007.

Government officials suggest that the drying up of these financial wells may have the beneficial effect of forcing the Greek economy into more productive avenues. Olympics spending and much of the EU money have gone to construction firms sheltered from foreign competition. "We cannot sustain that sort of sheltered growth forever," says Alogoskoufis. "So we have to give emphasis to investment in other, more competitive economic sectors like tourism, the food industry and energy."

Easier said than done, of course. To channel investment toward these sectors, the government is planning to simplify and cut taxes, reduce red tape linked to corruption and jump-start a stalled privatization program. Most of these initiatives, however, are having to wait until the end of the Olympics, which became such a priority that Prime Minister Karamanlis appointed himself Culture minister in order to personally oversee final preparations of the facilities. "No doubt the Olympics are taking up a lot of our political resources and firepower," acknowledges Deputy Finance Minister Petros Doukas.

The business community, which hardly conceals its glee at having conservatives in power, would settle for some government gestures, such as a tax overhaul, pension reform and spending cuts on health benefits, that don't require major new legislation. "At this stage we are not asking for a lot of macro measures," says Odysseas Kyriacopoulos, chairman of the Federation of Greek Industries. "We just want signs of a firm, clear commitment that the government is on the side of business." Some of his suggestions include paying exporters their value-added tax returns immediately rather than withholding them six months as the previous government did, granting promised public subsidies to businesses that have agreed to invest in new industrial zones under government incentive programs and reducing bureaucratic requirements so that businesses can be started up in two weeks instead of seven.

Bureaucratic problems have often been overcome by under-the-table payments, in keeping with the country's long-standing notoriety for corruption. According to Transparency International, Greece ranked lowest last year among the then-15 EU member nations in terms of public perception of official corruption. The European Central Bank in a 2003 report asserted that bureaucratic inefficiency and corruption cost Greece some E10 billion annually, equivalent to about 6.5 percent of last year's GDP.

Pasok was hurt at the polls by major corruption scandals -- including charges of insider trading by fairly senior government officials just before the Athens Stock Exchange crashed in 2000 and a shady real estate deal to develop thousands of residences that forced Pasok to ban ten of its legislators from standing for reelection in March.

But the corruption that most Greeks complain about is linked to petty bureaucrats with ample leeway to interpret regulations, especially those involving tax payments. "If tax collection is arbitrary -- if you allow tax auditors to do as they wish -- then you will have corruption," says Alogoskoufis.

He believes that simplifying tax regulations and reducing the corporate tax rate on retained earnings will largely resolve the problem, but his optimism hasn't convinced skeptics, who advocate purging venal bureaucrats and investigating malfeasance by Pasok officials. Government officials fear such a purge would require time and political effort that could be better spent on economic reforms.

"This government does not want confrontation," says former Piraeus Bank Group economic adviser Miranda Xafa, who spoke with II before her appointment last month as an alternate executive director of the International Monetary Fund. "Without it, however, they will not succeed in their stated aims of reducing corruption and waste in the public sector."

Nevertheless, the government, despite holding 165 out of the 300 seats in Parliament, doesn't want to incite Pasok, whose leader, George Papandreou, is preoccupied with reforming the party and changing its scandal-ridden image. "Pasok is engaged in a lot of internal housecleaning, and that certainly makes our life easier," observes Deputy Finance Minister Doukas.

Besides corruption, high tax rates have chased away investors. Last year Greece attracted only E586 million in new foreign direct investment, recording, as usual, one of the lowest FDI-per-capita ratios in the EU. After the Olympics, says Alogo- skoufis, the government intends to reduce the corporate tax rate from 35 percent to 25 percent. Although below the EU median of 30 percent, that would still be far higher than the 12.5 percent rate in Ireland, to which Greece is often compared unfavorably.

"Both countries were largely agricultural economies and started far behind the rest of the EU, but Ireland has been a lot more successful in drawing foreign investment, especially in high-tech industry," says Stratos Papadimitriou, former chairman of the Hellenic Center for Investment, a government agency dedicated to attracting investment to Greece. Besides having to pay higher taxes than in Ireland, adds Papadimitriou, potential corporate investors in Greece complain that they must contend with an inflexible labor market, a daunting judicial system and a maze of bureaucratic regulations.

Ireland has catapulted past Greece in living standards. Irish per capita income rose from 84.1 percent of the EU average in 1994 to 120.6 percent at the end of last year; Greek per capita income in 2003 reached only 72.9 percent of the EU average, up from about 66 percent in 1994. Although welcoming an eventual tax reduction, some analysts doubt that the Greek government can afford to reduce revenues in the short term. Balancing the budget and restoring discipline over expenditures "will require both tax and spending initiatives," says Giorgos Kofinakos, Athens-based general manager of Citigroup Global Markets.

Just before its March electoral defeat, the Pasok government asserted that the deficit for 2003 would be no more than 1.7 percent of GDP. But according to the new government, the actual figure is almost double that -- well above the 3 percent maximum allowed under EU guidelines. And the European Commission predicts Greece will be among six EU members that will exceed the 3 percent ceiling this year, exposing it to a fine and other sanctions, such as having to set aside government savings equivalent to at least 1 percent of GDP.

The consequences for Greece of breaching the limit again would be worse than for wealthier delinquents like France and Germany. Greece is already being punished by the markets for having the EU's highest cumulative public debt burden -- 105 percent of GDP in 2003. If the budget deficit doesn't improve this year, warns Xafa, the former Piraeus Bank economic adviser, "the spread of Greek bonds over [German] Bunds could widen from the current 17 basis points." That's why Xafa doesn't expect government officials to probe for any additional deficits or rolled-over expenses in the murky accounts of state agencies during the Pasok era. "Though bringing a welcome increase in fiscal transparency, such an audit might initially trigger a sell-off in Greek bonds," she says.

Pasok, meanwhile, has accused the new government of inflating the budget deficit it inherited in order to renege on its campaign promises and prepare the public for austerity measures. "The prime minister and the New Democracy party are searching in vain for alibis and excuses not to follow up on their extravagant preelection commitments," read a statement issued by Pasok during a period of debate over the deficit in April.

The one bright spot in the bleak deficit picture is the economic dividend from improving relations between Greece and its traditional archenemy, Turkey. In May the countries agreed to shrink defense spending by up to 25 percent over the next five years. As part of that plan, Ankara announced a $10 billion cut and Athens canceled $2.4 billion in military procurements. The agreement came despite the defeat in April of a referendum in Cyprus that would have reunified the Greek and Turkish portions of the island.

Defense cutbacks alone won't be enough to bring the budget deficit under control. Senior officials say Olympics expenses make it impossible to cut public spending significantly this year. And the government has sworn to live up to its campaign promises not to impose economic austerity. A case in point is a decision to go ahead with an election promise to permanently hire at least 150,000 public employees who are now on temporary contracts. "If anything, the number of public sector jobs will increase in the next few years," concedes Deputy Finance Minister Doukas. "This will impose another burden on the economy."

An additional disappointment for advocates of tighter public finances is the government's decision in April to postpone pension reform. Greece has the most indebted social security system in the EU (Institutional Investor, August 2002). Evasion of contributions to the pay-as-you-go, state-run system by employees, employers and the government itself is so rampant that unfunded pension liabilities are estimated at 300 percent of GDP. (In Italy, the EU's second-worst offender, unfunded pension liabilities amount to about 100 percent of GDP.) A tepid reform by the Pasok government last year refinanced the country's largest pension fund, in effect postponing an even bigger crisis for two decades. "The budgetary challenges posed by the aging population should be tackled through a comprehensive strategy that includes further reform of the pension system," said the EC's January report.

While it was in opposition, New Democracy strongly agreed with this assessment. But now that his party is in power, Alogoskoufis says action on pension reform will have to await the possible reelection of the government in 2008. "There are other reforms that are more urgent and can be introduced without as much controversy and risk of social unrest," he explains.

Leading the list of those other reforms is a further privatization of state-controlled corporations. The Pasok government sold large chunks of public utilities to private investors. But the government kept enough equity to retain management control -- and assuage its militant trade union supporters, who continue to advocate state ownership of strategic industries.

The state, which once held more than a third of industry, began a privatization program in 1998 as part of the country's initiative to join the European Monetary Union. Today, the government owns less than 10 percent of industry, most of that in the energy and telecommunications sectors.

As with other key economic figures during the Pasok era, the revenues generated by privatization are subject to serious doubt. The Pasok government said it received more than E14 million from the sale of state companies' shares between 1998 and 2002. But according to studies by the Athens Stock Exchange, privatization revenues between 1998 and 2003 amounted to less than E10 billion. "We would welcome another privatization push -- what this market needs is more capitalization through good, quality stocks," said Panagiotis Alexakis in an interview shortly before he was forced to resign as president of the stock exchange in June because the new government felt he didn't deal forcefully enough with insider trading scandals during the Pasok era.

The New Democracy government seems divided on how quickly to proceed with further privatization. Deputy Finance Minister Doukas, whose main concern is the budget deficit, says he is hopeful that up to E3 billion can be raised before the end of the year by selling government shares in a number of companies. But his boss, Alogoskoufis, wants to avoid signaling the market that the government is in such dire financial straits that its shares can be bought at a bargain. "It might even be better to borrow than to sell cheaply," says the Finance minister. With global interest rates on the rise, however, covering the budget deficit with further loans could be too expensive and might hurt the country's credit rating. "The government has to privatize because the deficit is greater than anybody thought," says Constantine Xenos, head of research at Egnatia Securities, a subsidiary of Egnatia Bank, in Athens.

No matter what the pace of privatizations, there is widespread agreement about three entities that are likely candidates. They are the National Bank of Greece, the country's largest bank; telecom operator Hellenic Telecommunications Organization, or OTE; and Olympic Airlines -- known respectively in local financial circles as "the good, the bad and the ugly."

NBG, with a current market capitalization of $7 billion, gets uniformly high marks among Athens-based analysts. In 2003 the bank showed a 15.4 percent return on average equity, a net interest margin of 2.7 percent and an efficiency ratio of 66.2 percent. "Looking at NBG's efficiency ratio, I would say it is comparable to most large European banks," says Ionna Telioudi, head of research at HSBC Pantelakis Securities. In 2003, NBG reported E360 million in net profits on E54 billion in total assets, a 69 percent increase over the previous year's net profits of E213 million on the same asset base. Part of the reason for the jump was a rebound after profits fell 15 percent in 2001 and 35 percent in 2002. The bank is also benefiting from a recent cost-cutting strategy and from a boom in lending.

Small-business and retail lending barely existed in Greece throughout the second half of the 1990s, because the central bank kept interest rates high to stifle inflation and to meet the Maastricht criteria for the country's 2001 entry into the euro zone. But in the past two years, the 12.5 percent prime rate has plummeted to 2 percent. As a result, NBG loans to small businesses grew by 65 percent and consumer loans by 27 percent in 2003. "And this is fat-margin lending," says NBG chief economist Paul Mylonas. He expects such loan growth to remain high in coming years because the debt-to-income ratio for Greek companies is less than half the EU average. By contrast, loans to government agencies have shown no growth. "We have a deliberate policy to withdraw from public sector loans because the spreads are peanuts," says Mylonas.

The government still owns 7.5 percent of NBG and controls an additional 25 percent of its shares through state-run pension funds. But in order to comply with EU policies, it has allowed the Greek financial system to move from its traditionally closed, protected model to a more open one with few restrictions on capital flows. "Basically, the government has turned the bank over to a professional management team since the 1990s and left them alone," says Egnatia Securities analyst Xenos.

In April the government appointed a new bank chairman, Takis Arapoglou, who is known to favor total privatization. NBG is an obvious candidate for eventual takeover by a bigger European bank. Its domestic network of 590 branches exceeds that of its closest competitor, Alpha Bank, by considerably more than 100 outlets. Adding to NBG's appeal is its expansion into the Balkans, which last year generated nearly 10 percent of the bank's profits though accounting for only 4 percent of its assets.

A somewhat less appealing candidate for sale is telecom operator OTE, which is listed on the Athens and New York stock exchanges. Thirty-three percent owned by the government and with a market capitalization of $6.58 billion, OTE saw profits of E433 million on E4.94 billion of revenues in 2003, up from E345.8 million on E4.3 billion of revenues the year before. But OTE has failed to live up to the expectations that greeted its partial privatization (66 percent) in 1996. Back then it was the most profitable telecom in Europe, thanks to its fixed-line telephone monopoly in Greece and long-distance rates that were among the highest in the world.

Because it was such a cash cow, OTE has been an object of constant government intervention -- it has had six CEOs in the past eight years -- and a font of jobs for Pasok party faithful. The revolving door management has struggled to cope with recent challenges, such as the opening of the domestic telecom market in 2002. OTE has seen its total monopoly drop to an 87 percent market share, despite slashing its rates to ward off new rivals. Evidence of the toll that competition is taking on OTE came with the announcement of the financial results for the first quarter of this year. Revenues rose to E1.23 billion from E1.1 billion in the first quarter of 2003. But net income plunged to E49.1 million from E113.1 million in the first quarter of 2003 -- a 56.6 percent drop. Abroad the company has fared much worse. In Romania it holds controlling stakes in ailing fixed-line operator Romtelecom and its nearly bankrupt wireless subsidiary, Cosmorom. Foreign institutional investors are losing patience with OTE's Romanian operations. "The investment community seems to prefer that OTE sell its stake instead of putting more money into assets that are problematic," says HSBC Pantelakis's Telioudi.

In April the government appointed a new OTE chairman, Panagis Vourloumis, whose brief is to sell the government's one-third holding to a strategic investor. But the global telecom market is still suffering from the heavy financial losses of recent years, and buyers are scarce. "It is hard to find a strategic investor, because most major European telecoms haven't recovered enough to make that sort of investment," says Christos Avramides, general manager of Athens-based Proton Asset Management, a subsidiary of financial conglomerate Proton Group. "I'm not sure what options the government has with OTE."

The government's options are even more limited and depressing in the case of Olympic Airlines, a fully state-owned company that is up for sale. "Olympic is the worst example of a state company," says Vassilis Vlastarakis, head of research for Contalexis Financial Services, a leading Athens brokerage. "Its management is awful. Its finances are a mess, and it has constant financial scandals." The EC agrees and has launched an investigation to determine whether the Pasok government gave subsidies to the airline in violation of EU rules. "Unless the privatization process is completed in full conformity with European legislation, the company will have to be placed in liquidation," Loyola de Palacio, EC commissioner for Transport and Energy, warned in March.

Attempts to reach Olympic's management, including a call to chairman and CEO Ioanna Papadopoulou, were unavailing. But senior government officials don't defend the airline's troubled reputation. "The company is in very substantial financial distress and is loaded with debt and bad practices," says Deputy Finance Minister Doukas. "We as a government are willing to bend over backwards to attract a suitable strategic investor, and we will make life very easy for such a partner."

Any investor would certainly insist that the government assume all of Olympic's debt. Unfortunately, nobody outside management knows the scope of that debt, because more than two years have passed since the company issued an annual report. Even the number of Olympic planes that are owned versus leased remains a secret. With 7,500 employees, the airline is notoriously overstaffed. But the General Confederation of Greek Labor, the powerful trade union entity, staunchly opposes any job cutbacks.

As with the other tough economic decisions ahead, action on Olympic Airlines has been put on hold by the government until the games are over. And that's just fine with labor leaders. "Let's have a good summer and then come back for business in September," says George Romanias, the General Confederation's influential economist.

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The Greek way: An interview with Giorgos Alogoskoufis

For all the lip service and euros the Greeks are paying to antiterrorist measures as hosts of the Olympics, Institutional Investor found almost no evidence of enhanced security on a visit to Economy and Finance Minister Giorgos Alogoskoufis just 120 days before the start of the games. In the lobby of the dowdy glass-and-concrete ministry building in downtown Athens, guards didn't ask for identification or walk II Contributor Jonathan Kandell through a metal detector or even inquire whether he had an appointment. On the sixth floor, again no questions asked, he was instructed to join a group of supplicants -- mostly businessmen -- in a waiting room. It was St. George's Day, honoring the dragon-slaying saint after whom Minister Alogoskoufis was named, and his office was fragrant from several congratulatory bouquets. During the interview Alogoskoufis, 49, who has a doctorate in economics from the University of London and has served as a member of Parliament, sounded more cautious than bold in describing imminent battles with his country's economic dragons.

Institutional Investor: For seven years you sat in opposition as the shadow minister of Economy and Finance. Now that you are the real minister, what has been your biggest surprise?

Alogoskoufis: When you finally face a problem, it's always a surprise, and the biggest problem is the fiscal situation. The deficit is turning out to be much larger than we imagined.

Does that mean you will have to cut back social spending?

We are hoping to gradually introduce new social spending. But it won't happen in the first year of this government. One priority will be to keep the construction sector running after the Olympics, giving emphasis to infrastructure projects outside of Athens in the rest of Greece.

The left-wing Panhellenic Socialist Movement government presided over several consecutive years of remarkable economic growth. Shouldn't your predecessors be given credit for moving Greece closer to convergence with European Union living standards?

Achieving convergence with the rest of the EU is the big challenge. Greece hasn't been affected by the economic stagnation in the rest of the EU over the past few years mainly because of our expenditures on infrastructure projects associated with the Olympics. But this spending has been on construction -- a sheltered sector. We cannot sustain that sort of sheltered growth forever. So we have to give emphasis to other, more competitive sectors of the economy, like tourism, the food industry and energy.

How do you intend to maintain or increase economic growth?

Our first priority will be to help investment generally and foreign direct investment in particular. All studies show that Greece has done a bad job of attracting foreign direct investment compared with the rest of the EU. This is due above all to our tax system. So we want to simplify the system to make certain that firms that keep their books correctly have nothing to fear. Also, we want to reduce tax rates for nondistributed profits of corporations -- that is, profits that get reinvested -- to 25 percent, from the present 35 percent.

How will you deal with the issue of corruption, which seems especially linked to taxes?

If tax collection is arbitrary -- if you allow tax auditors to do as they wish -- then you will have corruption. So by simplifying tax collection, there will be less scope for corruption.

Are you planning to tackle the issue of labor reform?

There is a need for more job flexibility and changes in overtime rules, but we will encourage employers and trade unions to try to resolve these problems by themselves. It is pointless for the government to take initiatives that will create a lot of opposition from the unions.

When you were in the opposition, you were very vocal about the need to deal with the huge deficits in the pension system. How much of a priority is pension reform?

It is not on the front burner. Not because we don't feel that it has to be tackled eventually, but because there are other reforms that are more urgent and can be introduced without as much controversy and risk of social unrest. Maybe after the next election in four years, we can consider pension reform. The major problem is demography -- too many older people and too low a birthrate. But Greece attracts young workers from other countries -- the Balkans, the former Soviet Union, the Middle East -- and many of them are illegally employed. If we can incorporate them properly into the economy and get them to contribute to the pension system, then it will be better funded. For us this is the way to go. It would be too difficult and costly to switch from the pay-as-you-go system to a privately funded system.

How soon will there be further privatizations of state-controlled companies?

We will introduce a new privatization program in the coming months. But we aren't too keen to sell our shares quickly at low prices just to help cover the fiscal deficit. It might even be better to borrow than to sell cheaply. So we will be cautious. We want to look at the management of firms that have been partially privatized before we proceed. Some management changes have already taken place -- at [telecommunications operator] OTE, for example. The idea being that through better management we can create more value for these companies and sell them later at better prices.

Usually, a new government is strongest at its beginning. But with so much focus on the Olympics, is valuable momentum toward economic reforms being lost?

Falling behind a few months isn't the end of the world.

By the end of your term, what would you like to see as your main accomplishment?

If we can have annual economic growth near 5 percent and bring down unemployment from over 9 percent now to 6 percent, then we will have succeeded.

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Are the Greeks poor sports?

Perhaps the single most enduring image Greeks harbor of their preparations for the Olympic Games was broadcast seven years ago. A television reporter was interviewing a kiosk owner in downtown Athens about traffic snarls and other traumas caused by work on a new subway system, when suddenly the man's kiosk sank into the ground behind him -- devoured by a monstrous tunnel-boring machine. As the August 13­29 Olympics approach, Greeks often sound like survivors of an ordeal that has almost consumed them. And sometimes, to put it bluntly, they sound like whiners.

First, there is the price tag. The initial E2.4 billion ($3 billion) budget has soared past E6 billion and is still climbing as the country works overtime to finish stadiums, subway stations and roads. Deputy Finance Minister Petros Doukas, whose main brief is to manage the budget deficit, points out that, as the birthplace of the games, Greece has a moral obligation to host a really good Olympics." But then he adds, with a sigh, "The whole venture has been a taxing experience on our resources."

Yet senior officials see no contradiction in fretting that the country will lose a key driver of economic growth once the Olympics end. Economy and Finance Minister Giorgos Alogoskoufis (see box, page 38) cites Olympics spending as the single biggest reason Greece has been able to avoid the economic slowdown suffered by other European Union countries in recent years.

Much of that spending has brought about a needed overhaul of infrastructure in the capital and the surrounding region. A new international airport has been inaugurated, along with a superhighway that can speed travelers to downtown Athens in less than 30 minutes. Streets have been broadened and sidewalks repaved. As the spiderweb of metropolitan and suburban train stations spreads, it is hoped that more Athenians will opt for mass transportation over private cars -- whose numbers exploded by an estimated 2,000 percent over the past three decades. New hotels have opened, and old ones have been refurbished. The dull, gray façades of the buildings have been scrubbed white. "Athens is a totally different city than it was a decade ago," says Deputy Mayor Theodore Skylakakis, who is in charge of preparations for the Olympics. "We want it to become a real tourist destination, not just a transit point [to the Greek Isles]."

Whether Athens achieves that goal will depend on how many of the expected 1.5 million foreign visitors show up for the games and return home gushing with enthusiasm about the city. Nothing would please tourists more than to feel safe from terrorist incidents. To allay their fears, Greece has spent $1.2 billion on security measures -- a record for any Olympics -- though not without the usual grumbling. "We are paying the bill for 9/11," said Athens Mayor Dora Bakoyannis somewhat undiplomatically at a press conference in December.

Much of the money will be used to deploy some 70,000 police and troops in and around Athens, especially at the 70 Olympic sites. At the Greek government's request, NATO ships and planes will patrol the coast and airspace. A group of experts from the U.S., several European countries and Israel is offering advice on security. But off-the-record interviews with a few of these officials suggest that -- in the words of one of them -- "there is a cultural gap to overcome." Many months were spent convincing Greek officials that a pro-Arab slant in the Israeli-Palestinian conflict and opposition to the U.S. invasion of Iraq wouldn't be enough to safeguard Athens from terrorism. "There are scores of countries that have their own terrorist groups who would welcome a chance to make their causes known to the 1.5 billion people who will watch the Olympics on television," says one Western security expert. "I think we've finally gotten that across."

Delays in completing major Olympic venues pose threats as well. Greek officials like to joke that, in keeping with the national character, construction work on facilities will be finished at the last possible moment, even if volunteers have to be recruited to help roll the massive, movable roof over the main Olympic stadium into place. But that won't give police officers enough time to familiarize themselves with potential hiding spots for terrorists in the new facilities. "They will be lucky to have all the surveillance cameras in place," says one foreign expert.

No amount of security spending has convinced ordinary Greeks that they are out of harm's way -- especially after the al-Qaeda-linked train bombings in March that killed 191 people in Madrid. In subsequent opinion surveys 80 percent of respondents said they were convinced that a terrorist attack on Athens during the Olympics is "inevitable." They were even more on edge in May after three bombs exploded outside a police station in a residential Athens neighborhood, wounding an officer. A Greek extremist group calling itself Revolutionary Struggle claimed credit in a letter to the newsweekly Pontiki and said the attack was a warning to "wealthy Western tourists" who planned to attend the games.

Citing public apprehension, Kathimerini, a leading daily, commented in April: "If the fateful strike on the Twin Towers on September 11, 2001, had taken place before the procedure to award the 2004 Games had begun, we probably would not have even submitted our candidacy. But now, what can we do?"

Maybe follow the lead of the International Olympic Committee, which has bought a $170 million insurance policy for the games to cover cancellation in the event of terrorism or natural disaster. -- J.K.

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Athens: What to do, where to stay

Because of its huge inventory of antiquities and its paralyzing traffic, Athens has long been a daunting destination for visitors on short stays. But thanks to a new subway system and pedestrian routes, even somebody with only a few leisure hours can absorb the pleasures -- ancient and contemporary -- of the pulsating Greek capital. Get off at Monastiraki, a major subway stop, and stroll a block to Adrianou, a mile-and-a-half-long paved walkway that circles the base of the Acropolis. Along the route, a stone's throw away, are some of the world's greatest archeological sites: the ruins of the Agora, the hilltop Parthenon and the Temple of Hephaestus, a masterpiece of Doric architecture.

Circling back to Monastiraki, walk up Athinas Street for six blocks to the sprawling, cavernous central market. Many Athenian bankers and CEOs claim they learned to be tough negotiators as kids by trailing behind their mothers as they haggled with butchers in bloodstained aprons and fruit vendors trying to peddle an extra dozen figs. But tell these same captains of finance and industry that you sampled patsa (tripe soup) with hot pepper flakes and chopped garlic in wine vinegar, and you might earn a few basis points. Papandreo Taverna serves what is arguably the finest tripe soup in the central market, at just $5 a bowl. The restaurant is open 24 hours a day to accommodate late-night revelers who breakfast on the stuff because it is reputed to cure hangovers.

The maritime soul of Athens can best be savored in the port of Piraeus, especially around the yacht marina at Mikrolimano. Jimmy & the Fish is the kind of place where you encounter patrons who look like cast members of Troy. This restaurant's lofty reputation is linked to the fresh catch of the day, displayed tableside by the waiters. Jimmy & the Fish, 46 Alexandrou Koumoundourou, Mikrolimano; (30) 210-412-4417; about $70 per person, including wine and the standard 10 percent tip.

Although the Olympics have sparked a luxury hotel renaissance, no other establishment offers the vistas and location of the St. George Lycabettus, a boutique hotel perched on a hill in the fashionable Kolonaki neighborhood. It's an easy walk to most government and business appointments, and the return ascent past chic cafés and shops is all the exercise you need. All rooms have high-speed Internet access, but make sure to stay in one with a terrace facing the Acropolis and the Aegean Sea beyond. St. George Lycabettus Hotel, 2 Kleomenous Street; (30) 210-729-0711; 158 rooms, with the Acropolis-view suites starting at $250, including tax and service charge. -- J.K.