VZCZCXRO2899
RR RUEHIK
DE RUEHTH #1515/01 3091708
ZNR UUUUU ZZH
R 041708Z NOV 08
FM AMEMBASSY ATHENS
TO RUEHC/SECSTATE WASHDC 2712
INFO RUEHIK/AMCONSUL THESSALONIKI 1966
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 05 ATHENS 001515 
 
SENSITIVE 
SIPDIS 
 
PASS TO EUR/ERA: JONATHAN KESSLER AND BEN ROCKWELL 
PASS TO TREASURY/IA: LUKAS KOHLER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN GR
SUBJECT: THE GLOBAL FINANCIAL CRISIS: IMPACT ON GREECE AND 
THE GOG'S RESPONSE 
 
REF: ATHENS 1397 
 
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Summary 
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¶1.  (SBU) While the Greek banking system has not been hit by 
first-round effects of the global financial crisis given its 
limited exposure to the complex financial products at the 
center of the storm, it has been affected by the ensuing 
freeze in the capital markets and the increased cost of 
raising liquidity.  Initially declaring Greek banks safe from 
the crisis, the Karamanlis government recently followed the 
example of UK Prime Minister Gordon Brown and others in 
Europe by developing a 28-billion Euro bank aid plan.  The 
GoG,s plan was light on details when first announced, but 
the government last week made public concrete conditions for 
participating banks.  These conditions include mandatory 
state participation in participating banks share capital, 
caps on executive pay and dividends to shareholders, and a 
state representative on bank boards.  Prior to the 
publication of these details, most of Greece,s largest banks 
had said they would avail themselves of the package, and most 
of the smaller banks were expected to follow suit.  Recent 
press coverage, however, indicates that the larger banks may 
be rethinking the assistance.  Over the weekend, Greece,s 
largest private bank, the National Bank of Greece, indicated 
it is reconsidering the pros and cons of participation, which 
may be a reaction to the government,s new conditions. 
Moreover, the global crisis has exposed weaknesses in the 
Greek economy with which the GoG will need to contend if it 
is to weather the financial storm in the longer run.  One way 
to address these weaknesses will be to develop a 2009 budget 
that has strong policy aims (e.g., decrease in size of public 
sector and protection of the vulnerable) and is underpinned 
by credible targets and assumptions.  End Summary. 
 
--------------------------------------------- -------- 
The Global Crisis: Impact Hits Greece through Jitters 
--------------------------------------------- -------- 
 
¶2. (SBU) As the international crisis hit, the government 
firmly maintained that Greek banks were insulated because 
their exposure to so-called toxic debt instruments was 
limited.  This is largely because for the last decade, Greek 
banks sought to exploit traditional investment opportunities 
in the nascent but expanding markets of Greece and Southeast. 
Europe.  Since growth in these markets was high, the returns 
on investments were high enough to satisfy Greek banks, 
appetites without having to turn to riskier investment tools 
(e.g., credit derivatives).  The GoG also maintained that 
Greek banks had healthy capital bases and were stable, with 
sensible asset-equity ratios and with an average 
loan-to-deposit ratio of approximately 90 percent for the 
sector as a whole, meaning that banks, dependence on 
international and capital markets is small. 
 
¶3.  (SBU) Nonetheless, the global crisis began to have some 
impact on banks here in late September, as the level of fear 
increased in response to what was happening in financial 
markets elsewhere, and people began to question whether their 
deposits were safe in Greek banks.  Following public 
statements in early October to try to calm depositor jitters 
in (see reftel), the GoG submitted legislation to Parliament 
on October 10 to increase its deposit insurance from 20,000 
Euros per person per account to 100,000 Euros per person per 
account.  This was largely a result of the October 7 EU 
finance ministers agreement, but also in response to higher 
than average withdrawals from the Greek banking sector. 
According to the Bank of Greece (Greece,s central bank), 
from late September until approximately October 10, the Greek 
banking sector experienced a "mini-bank run," with deposit 
withdrawals from banks increasing from a usual daily average 
of 30-40 million Euros to 130-140 million euros.  The 
government,s move helped calm Greek depositor jitters, and 
daily withdrawals subsided to more normal levels the 
following week.  Parliament passed this legislation on 
October 23.  (Note: Greece,s guarantee deposit scheme is 
financed by member banks, each of which pays into a fund 
according to its level of deposits and share of the Greek 
banking sector.  End Note.)  In addition, statements by 
senior GoG leaders indicate the government remains firm in 
its political commitment to guarantee all deposits of Greek 
citizens in Greece (see reftel). 
 
---------------------------- 
The 28-Billion Euro Aid Plan 
 
ATHENS 00001515  002 OF 005 
 
 
---------------------------- 
 
¶4. (SBU) Paralyzed capital markets and higher borrowing costs 
were beginning to manifest their impact on Greece,s banking 
sector in other ways as the rate of credit expansion slowed 
in September.  In response, and following the model 
established by UK Prime Minister Gordon Brown,s bank rescue 
plan, the Karamanlis government on October 15 announced a 
28-billion Euro aid plan for Greek banks.  The 28 billion is 
broken up as follows: (1) the government will guarantee up to 
15 billion in bank-issued bonds/other paper in exchange for a 
fee and/or secure collateral from each participating bank; 
(2) the government will issue up to 8 billion in new 
government bonds, turning over the bonds to banks and 
allowing them to sell these in the repurchase market in 
exchange for a fee and/or secure collateral; and (3) up to 5 
billion to be made available to banks to increase their share 
capital in exchange for the sale of preferred shares to the 
government.  Initially, very few details were released on how 
the plan would be implemented on a bank-by-bank basis and 
what the conditions of participation would be.  Finance 
Minister George Alogoskoufis justified the plan publicly as 
being part of a pan-European effort to restore confidence in 
the financial system.  He stated that all banks, including 
Greek banks, were suffering a crisis of confidence, higher 
interest rates and lack of liquidity.  The goal of the 
government,s plan, according to Alogoskoufis, was not to 
bailout Greek banks, but rather to shield the Greek economy 
from an unprecedented crisis.  Alogoskoufis stressed that 
Greek banks would be at a disadvantage to their EU 
counterparts if the GoG did not extend support as other EU 
countries had done.  Moreover, some international financial 
commentators have voiced concern over the level of Greek 
banks, exposure in Balkan countries such as Romania, 
Bulgaria, and Serbia as those countries, banks and real 
economies get hit by the crisis. 
 
¶5.  (SBU) The GoG made additional details publicly available 
on October 30.  The institutions which choose to participate 
in the GoG,s bank plan must accept the following conditions: 
(1) state participation in their share capital through the 
sale of preferred share to the government; (2) caps on 
salaries of bank executives (no more than the Bank of Greece 
Governor); (3) a 35 percent cap on dividends to stockholders; 
(4) the scrapping of bonuses to executives; and (5) a state 
representative on the participating bank's board who will 
have veto rights regarding distribution of profits and 
benefit policies.  The GoG has set up a supervisory council 
made up of the Minister of Finance and the Central Bank 
Governor, among others, to oversee implementation of the 
package.  Each bank must decide whether to participate in the 
plan by February 1.  The government has not indicated 
publicly what it will charge (in fees) in exchange for the 
liquidity instruments, how much liquidity and capital it will 
make available to each bank, and what it will accept as 
secure collateral in exchange for the guarantees and bonds. 
 
 
------------------------------- 
Bank Reaction and Participation 
------------------------------- 
 
¶6. (SBU) The banks, position on participation has evolved as 
the government has added meat on the bones of its plan.  In 
several meetings with A/DepEconCouns, senior officials at 
Greece,s five largest private banks (in order of size, 
National Bank of Greece, EFG Eurobank, Alpha Bank, Bank of 
Piraeus, and Emporiki Bank) indicated shortly after the plan 
was announced that they did not need the assistance, and did 
not have enough details on the government,s conditions.  One 
week after the government announced the plan, Deputy Governor 
of the Central Bank Panayiotis Thomopoulos and head of the 
Council of Economic Advisors George Sfakianakis both 
indicated to A/DepEconCouns that the GoG was still working on 
the conditions of participation and a methodology for 
determining the amount of assistance and fee per bank. 
Following an October 23 meeting with the GoG, six of 
Greece,s largest seven banks (the five largest private banks 
plus Greece,s two state-owned banks) said publicly they 
would take part in the assistance. (Note: Only Emporiki 
indicated immediately following the meeting it would not 
participate in the Greek plan, opting instead to take part in 
the French plan under its parent, Credit Agricole Group.  End 
Note.)  The government expects smaller financial institutions 
to participate as well.  Thus far, of the latter, only Marfin 
Investment Group has indicated it will not participate, 
publicly voicing criticisms that the package is inadequate 
 
ATHENS 00001515  003 OF 005 
 
 
and unfair and creates questions over the condition of the 
domestic banking system. 
 
¶7.  (SBU) Since the GoG announced its conditions on October 
30, there are indications that some of the larger banks may 
be rethinking their participation.  Paul Mylonas, Chief 
Economist and Chief of Strategy for the National Bank of 
Greece, told A/DepEconCouns on October 31 that despite press 
reports indicating National Bank was on board, his bank has 
not decided whether to participate.  Takis Arapoglou, CEO and 
chairman of National Bank, confirmed this position during an 
interview with To Vima newspaper on Nov. 2.  Arapoglou told 
To Vima that National Bank is able to cope with worsening 
credit conditions since it has "excess liquidity" of 2.0-2.5 
billion euros and a 10 billion Euro loan portfolio it can 
leverage for extra liquidity as needed.  (Note: The excess 
liquidity is likely a reference to National Bank's low 
loan/deposit ratio of 80 percent, one indication it has 
deposits available for further loans or to rollover current 
debt.  It is not clear what caused this about face by 
National Bank, but during A/DepEconCouns, discussion with 
Mylonas, it was clear that he and others at the Bank were 
frustrated by the GoG,s new terms specified on Oct. 30.  In 
particular, he seemed agitated by the GoG,s insistence that 
those who opt into the package must issue preferred shares to 
the government in exchange for an increase in share capital. 
He also appeared to be bothered by the caps on pay and 
dividends.  End Note.) There are some indications in the 
press that other banks may also be questioning whether or not 
to take the package in exchange for what many deem arbitrary 
conditions. 
 
¶8.  (SBU) Mylonas told A/DepEconCouns that the government has 
agreed to a methodology for assessing a fee for the 
guarantees and bonds that is based on two components: a 
fixed, standard component across banks and a component 
specific to each participating bank that factors in that 
particular institution's spreads in the credit default swap 
(CDS) market.  Mylonas also indicated that the GoG has 
established a formula for how much of each instrument each 
bank will get based on bank size.  Under the fee methodology, 
Mylonas believes that National Bank would be charged 
approximately a 100 basis point premium (over the 
government,s cost of borrowing) for the guarantees and bonds 
(approximately 50 basis points for the common component and 
50 basis points based on its CDS spreads).  He does not yet 
know how much of each instrument his bank will be allowed to 
access if it participates, but the GoG has told National 
Bank's senior management that they would receive 
approximately 1 billion of the 5 billion Euro capital 
injection in exchange for the government buying some portion 
of preferred shares at a 10 percent yield.  (Note: Mylonas 
indicated the number of shares is still in question, but 
likely will be based upon market pricing of National Bank's 
stocks, since they are traded on the Athens Stock Exchange. 
End Note.) 
 
¶9.  (SBU) Mylonas and officials at Alpha Bank, Eurobank, and 
Piraeus bank do not have a clear understanding of what type 
of secure collateral the government will demand in exchange 
for the guarantees and bonds.  The legislation does not 
specify, and bank officials question whether such an exchange 
can be legally executed.  Mylonas was adamant that pledging 
collateral to the GoG would violate the "negative pledge 
clause" the bank inserts in most of its credit instruments. 
(Note: A negative pledge clause is a contract term which says 
that the borrower will not pledge the collateral to anyone 
else, including new creditors.  This is used to ensure that 
the senior creditors or those at the front of the line have 
first pickings on the collateral before parties at the back 
of the line.  A breach of this clause could give rise to an 
event of default.  End Note.)  Mylonas believes the GoG will 
back away from this condition. 
 
--------------------------------------------- -- 
Implications for Greece,s Economy, Budget, Debt 
--------------------------------------------- -- 
 
¶10. (SBU) Despite the crisis, limited impact in the banking 
sector thus far, it has exposed weaknesses in the Greek 
economy with which the GoG will need to contend.  The rate of 
growth, already slowing in the first two quarters of 2008 (to 
3.5 percent, down from 3.8 percent in the first two quarters 
of 2007), is now projected by external analysts to slow 
anywhere from 3.2 percent (IMF projection) to 2.4 percent 
(Economist Intelligence Unit projection) for 2008 as a whole. 
 While more robust than the rate projected in the Eurozone 
 
ATHENS 00001515  004 OF 005 
 
 
(1.4 percent, according to the Economic Commission), it is 
considerably down from Greece,s 2003-07 average of 4.3 
percent.  Projections for 2009 range from 2.5 percent 
(European Commission) to 2 percent (IMF).  (Note: The GoG,s 
projections for 2008 and 2009, as reflected in the draft 2009 
budget, continue to be a robust but unrealistic 3.4 and 3.0 
percent, respectively.  End Note.)  The slowdown in growth is 
due primarily to a fall in investment and consumption, both 
of which had already been on the decline due to the cooling 
of the Greek real estate market.  These drivers of growth are 
likely to continue to slow as a result of tightening credit 
conditions, the higher costs of borrowing, and the global 
slowdown.  In the short-run, these factors may help alleviate 
pressure on prices, increase the domestic rate of savings, 
and help shrink Greece,s current account deficit (projected 
to be over 14 percent in 2008, the highest in the EU). 
 
¶11. (SBU) In the longer-run, to return to strong growth 
rates, Greece will need to place structural and 
administrative reforms at the top of its agenda in order to 
shrink the size of its public sector and increase its 
competitiveness.  This will mean placing less of an emphasis 
on fiscal consolidation as a means to an end, and more as a 
means of helping to achieve specific goals (e.g., shrinking 
the deficit through both targeted tax increases and spending 
decreases) that are underpinned by credible policies, targets 
and assumptions.  The draft 2009 budget, for example, is 
largely viewed as being unrealistic both in terms of its 
assumptions (growth as highlighted above; fiscal deficit of 
2.3 percent of GDP in 2008, despite the Eurostat upward 
revision of the 2007 deficit from 2.8 percent to 3.5 percent) 
and in its aims (raising an additional 4 billion euros 
through new taxes in the face of slowing growth). 
 
¶12. (SBU) Efforts to control deficit spending largely have 
stalled the last two years, and the government,s recent 
efforts to shrink the deficit are not viewed as credible 
because they are not backed by a serious commitment and 
commensurate efforts to curb government spending.  The GoG,s 
claims that missing its deficit targets in 2007 and 2008 is 
due to the crisis also is not credible, since before the 
crisis hit, revenues for the first half of the year were up 
only by 3.9 percent (against a 12.5 percent target) and 
spending was up by 10 percent (against a 8.3 percent target). 
 While the beginning of the slowdown may be partially to 
blame, so too are unrealistic revenue targets and the 
Karamanlis government,s unwillingness to take the difficult 
steps necessary to bring down the deficit.  For example, 
rather than containing wage growth, Minister Alogoskoufis 
agreed to a series of public sector wage increases in 2008 
that will add approximately 8.9 percent to payroll costs in 
2008 alone.  To pay for these new expenditures as well as to 
make up for lower tax collections, the government pushed 
through a hasty new tax plan in late August that they hope 
will raise approximately 4 billion euros in revenues through 
2009 (1.4 billion this year, and at least 2.4 billion next 
year). 
 
¶13.  (SBU) While the GoG is hoping that the EU will ease its 
budget deficit limit (3 percent of GDP) to give countries 
space to manage a soft landing from the recent crisis, a 
higher budget deficit will mean that the government will need 
to borrow more to finance its fiscal spending.  In the draft 
2009 budget, the GoG projects a borrowing need of 43-44 
billion euros in 2009.  Absent cuts in the GoG,s spending 
program, the need to finance the 28-billion bank package will 
increase the government,s borrowing needs and its overall 
level of debt, which was already high at 94.8 percent (public 
debt) in 2007.  Another complication is that this new debt 
will all need to be financed at a much higher interest rate, 
since the government,s cost of borrowing has gone up as a 
result of (1) the crisis, which has caused investors to seek 
haven in safer investments, and (2) the market's perceptions 
of increased risk in Greece, stemming from the highest budget 
and current account deficits in the Eurozone.  (Note: The 
government,s lack of credibility on its fiscal targets and 
widening of its fiscal deficit led to Fitch Ratings 
downgrading its country outlook from "positive" to "stable" 
in mid-October.  The spread between Greek government 10-year 
bonds and the corresponding German bond reached an all-time 
high last week of over 160 basis points.  End Note.) 
Depending on the profile of the government,s debt, Greece,s 
higher spreads could place further pressure on the 
government,s interest bill in the 2009 budget and beyond. 
 
--------------- 
Public Reaction 
 
ATHENS 00001515  005 OF 005 
 
 
--------------- 
 
¶14. (SBU) The package is likely to pass Parliament, but the 
government has not won the hearts and minds of its public. 
The Karamanlis government,s justification of its bank aid 
package has been weak thus far.  The Greek public has seized 
upon the idea that the government is bailing out wealthy 
banks at a time when the average Greek pensioner, small 
business person and home owner is growing more desperate as a 
result of what are perceived to be shrinking incomes, 
increasing taxes and exploding (although abating recently) 
consumer prices.  More recently, Prime Minister Karamanlis 
and Minister Alogoskoufis have tried selling the package as 
necessary to the health of the Greek economy.  They have even 
gone so far as to say that the package will add 500 million 
euros to state coffers annually, all of which can be used to 
help support the poor and pay for public works. 
 
------- 
Comment 
------- 
 
¶15. (SBU) At a time when this government is entrenched in a 
series of corruption probes that have resulted in the 
resignation of two senior officials, the government,s bank 
aid may only serve to reinforce the common person's belief 
that this is a government by the rich for the rich. 
Opposition parties, meanwhile, have both exploited and fed 
this sentiment by calling the government,s bank aid plan a 
"crime against the people."  Our impression, however, is that 
the bank aid plan reflects the government,s legitimate 
attempt to respond to a complex situation at a time of 
tremendous uncertainty.  While many details of the plan are 
still evolving, so to are the crisis and its impact on Greece 
and other countries.  Many things remain unknown, including 
the effect that a slowdown in the Balkans will have on Greek 
banks that are invested there and how long interest rates 
will stay up.  While Greek banks may be hesitant to accept 
assistance right now, this may be because they are trying to 
get the GoG to back off of some of its terms.  As the crisis 
continues to unfold, and the impact spreads to the real 
economy globally, these banks may decide to take any terms 
the GoG offers to stay competitive and to protect their 
investments in regions like Southeast Europe, where the 
impact on the real economy may become more acute.  Of course, 
being Greece, there will also certainly be an element of 
making it up as they go along.  End Comment. 
SPECKHARD