R 101355Z DEC 08
FM AMEMBASSY ATHENS
TO SECSTATE WASHDC 2901
INFO USEU BRUSSELS
DEPT OF TREASURY WASHINGTON DC

UNCLAS ATHENS 001655 
 
 
E.O. 12958: N/A 
TAGS: ECON GR
SUBJECT: Greece's 2009 Budget Seen as Unrealistic and Out of Context 
with the Global Economic Crisis. 
 
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Summary 
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¶1.  (U) The GoG's draft 2009 budget submitted to Parliament November 
21 has been criticized by the press, citizens, opposition parties, 
and informed observers alike as being unrealistic and out of context 
with the current economic crisis and resulting slowdown.  Although 
all economic indicators originally included in a pre-draft of the 
budget presented about two months ago have been revised downwards to 
reflect the impact of the global economic crisis, the revised 
projections are far more optimistic than those by informed parties 
such as the IMF and various independent analysts.  The budget 
projects 2.7 percent growth for the country's GDP in 2009 (versus 
the IMF's projection of 2 percent) and 7.1 billion euros in 
additional revenues.  The budget projects a drop of the general 
government deficit to 2.0 percent of GDP in 2009 (versus the IMF's 
projection of 2.3 percent) from 2.5 percent in 2008 and reduced 
public debt at 91.4 percent of GDP in 2009 from 93.4 percent in 
¶2008.  At best, unrealistic targets will mean that the GoG will need 
to issue revisions during the year.  At worst, these targets could 
undermine the credibility of the GoG's commitment to economics 
reforms and result in international credit ratings agencies 
downgrading their outlook for Greece.  END SUMMARY. 
 
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The Draft 2009 Budget 
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¶2.  (U) On November 21, Economy and Finance Minister George 
Alogoskoufis submitted to Parliament the draft 2009 budget.  It aims 
at ensuring satisfactory economic growth, while further reducing the 
deficit, combating poverty (by funding a National Fund for Social 
Cohesion, continuing tax reforms, and cutting unemployment and 
ensuring the viability of the social insurance system.  According to 
its introductory report, the 2009 budget projects that the 
international economic crisis will continue in 2009 with significant 
consequences on the Greek economy.  All economic indicators 
originally included in a pr-draft of the budget presented about two 
months ago have been revised downwards; however, most press and some 
economic analysts have indicated that the GoG projections are too 
optimistic considering the uncertain times the global economy is 
facing. 
 
¶3.  (U) Addressing the Greek Parliament soon after the budget's 
submission, Minister Alogoskoufis admitted that the budget 
projections may prove too optimistic given the global economic 
crisis. He also said that the fiscal adjustment program at the 
center of the GoG's reform efforts, and which constitute one of the 
main targets of the GoG's economic policy, can only be of secondary 
importance in relation to the need to help mitigate the impact of 
the crisis on the real economy.  The budget envisages that the Greek 
economy will grow by 2.7 percent in 2009, down from 3.2 and 4.0 
percent in 2008 and 2007, respectively. The inflation rate will slow 
to 3.0 percent in 2009, from 4.3 percent in 2008 and 2.9 percent in 
2007, while private consumption will ease to 2.2 percent from 2.3 
percent in 2008 and 3.0 percent in 2007.  The unemployment rate is 
forecast to remain at 7.5 percent, unchanged from 2008 but down from 
8.0 percent in 2007. [Note: Greek unemployment figures are often 
criticized for considerably underestimating Greek unemployment as 
they do not include jobless people who are going through official 
state training programs (regardless of whether they find employment) 
and those who have been unemployed over a year and no longer benefit 
from unemployed assistance programs.  End Note.] 
 
¶4.  (U) Regular budget revenues are forecast at 64.2 billion euros 
in 2009, up 12 percent from 2008 while spending will rise 9.1 
percent to almost 66 billion euros in 2009 from 60.45 billion in 
¶2008.  Expenditures for wages will increase by 6.8 percent in 2009 
(versus 8 percent in 2008), and outlays for pensions also will rise 
at the slower pace of 12.7 percent in 2009 (versus 13.5 percent in 
2008). Expenditures for new armaments are projected to drop by 15.2 
percent in 2009.  The budget projects a drop of the general 
government deficit to 2.0 percent of GDP in 2009 from 2.5 percent in 
¶2008.  This will be difficult to achieve during a slowdown.  It also 
projects a drop in public debt to 91.4 percent of GDP in 2009 from 
93.4 percent in 2008.  To this effect, the budget provides for 7.1 
billion additional tax revenues, 13.2 percent up compared to 2008. 
 
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Programs to Mitigate Impact of Crisis 
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¶5.  (U) Despite the government's rhetoric for months that it would 
take steps to assist low income earners and the unemployed, the 
draft budget included surprisingly little new social spending.  The 
draft earmarked 350 million euros for the National Fund for Social 
Cohesion (inaugurated in 2008 with 100 million euros).  These 
figures are below the government's promises of 1.5 billion euros to 
the Fund for the 2008-2009 period. The Economy Minister attributed 
the difference to "the dramatic changes since 2007," which did not 
allow for more spending for the poor.  [Note: Late last week, the 
government announced further details on the 350 million earmarked 
for the Fund in the draft budget.  The GoG said these funds would be 
used to give special housing loan and heating benefits to 
pensioners, low-wage earners, and the unemployed.  In addition, the 
GoG announced that it was working on a 2 billion euros package of 
measures affecting 1 million low income or unemployed citizens. 
While light on details, the measures are to be funded through a 
combination of GoG and EU funds and include: (1) 70 million euros 
for an increase in the holiday benefit for 300,000 people; (2) 310 
million euros for an employment program for 60,000 current 
unemployed beneficiaries; (3) 500 million for a training program for 
small business to "preserve employment" and improve competitiveness; 
and (4) 380 million for a program to support getting people back to 
work and creating job opportunities for those that have to leave 
school early.  The government's announcement of these additional 
measures is seen as a direct response to criticism that its draft 
budget did not provide enough support for the most vulnerable.  The 
government is now being criticized for its lack of details on how 
these new programs will be implemented and for how they impact its 
draft budget targets.  It is not clear how much the GoG will fund 
(versus the EU), and whether the GoG will amend its draft budget to 
include these spending programs in 2009.  End Note.] 
 
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Government Debt 
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¶6.  (U) The general government debt is expected to reach 237,930 
billion euros in 2009 or 91.4 percent of GDP (228,868 billion or 
93.1 percent of GDP in 2008). The draft budget indicates the 
government will borrow 41 billion euros in 2009 in order to finance 
its budget needs.   This estimate is very optimistic considering 
that the government borrowed 43.4 billion euros in 2008, exceeding 
the target of last year's budget by 6.4 billion euros, and that the 
cost of borrowing will be higher next year.  Payment of interest on 
the current debt bill is expected to exceed 12 billion euros in 
¶2009.  Minister Alogoskoufis said that, due to uncertainty on the 
cost of borrowing, the borrowing plan for 2009 will be flexible. 
The government borrowing figures reportedly include the 5 billion 
euros portion of the State bank aid plan that would be used to 
inject capital directly into the banking system in exchange for 
preferred shares for the government. 
 
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Comment 
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¶7.  (U) The press and opposition parties unanimously have criticized 
the 2009 draft budget as being unrealistic under today's 
extraordinary circumstances.  Some analysts wonder how the Greek 
government will manage to collect 7.1 billion additional revenues in 
an environment of low demand and economic slowdown.  Minister 
Alogoskoufis claims that they will come from the "fight against tax 
evasion," but we believe this argument to be unrealistic judging 
from the poor results of similar efforts in previous years.  (Poor 
tax collection obliged the Economy Ministry to revise the target for 
revenue collection down from 54.6 billion euros to 53.8 billion in 
2008 as the target in the 2007 budget proved also too optimistic.) 
While the recent measures to help the most vulnerable should be 
helpful in mitigating the impact of the crisis, too few details have 
been made available, and it is not known how these programs will 
impact the GoG's deficit targets, which are already a stretch in the 
current environment.  Further, instead of boosting investments and 
domestic demand the budget leaves the public investment program for 
2009 at the same level as 2008 (8.8 billion euros).  Finally, many 
view the growth projection of 2.7 percent in 2009 as too optimistic 
and higher than the projections of international economic entities 
(Eurostat, UBS, IMF, OECD etc.) of no more than 2 percent (at best) 
growth for Greece in 2009.  Post expects a revision of key targets 
early in 2009.  The current GoG projections could undermine Greece's 
credibility with investors and ratings agencies and result in a 
country downgrade.  END COMMENT. 
 
SPECKHARD