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Viewing cable 09ATHENS216, NEW GREEK FINANCE MINISTER ON GLOBAL FINANCIAL

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Reference ID Created Released Classification Origin
09ATHENS216 2009-02-19 13:44 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Athens
VZCZCXRO6799
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHTH #0216/01 0501344
ZNR UUUUU ZZH
R 191344Z FEB 09
FM AMEMBASSY ATHENS
TO RUEHC/SECSTATE WASHDC 3241
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHIK/AMCONSUL THESSALONIKI 2032
RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS SECTION 01 OF 03 ATHENS 000216 
 
SENSITIVE 
SIPDIS 
 
DESK PASS TO TREASURY/IA - LUKAS KOHLER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN GR
SUBJECT: NEW GREEK FINANCE MINISTER ON GLOBAL FINANCIAL 
CRISIS AND ITS IMPACT ON GREEK ECONOMY 
 
REF: ATHENS 176 
 
ATHENS 00000216  001.2 OF 003 
 
 
------- 
Summary 
------- 
 
1. (SBU) In a February 13 courtesy call, the Ambassador 
discussed the global financial crisis and its impact on the 
Greek economy with Ioannis Papathanasiou, Greece's new 
Minister of Economy and Finance.  The new Minister summarized 
his recent EcoFin meetings in Brussels, the revisions to the 
Greek Stability and Growth Program (SGP) -- the government's 
economic program under the European Monetary Union (EMU) -- 
and his thoughts on the major problems facing the Greek 
economy.  The Minister's tone and rhetoric echoed his public 
statements that the global financial crisis would not impact 
the Greek economy too severely, begging the question of how 
realistic the GoG's analysis and projections are.  While the 
new Minister appeared to have a fair grasp of the issues 
facing the country, he seemed to portray Greece as a victim 
of the global crisis and what he regards as unfair rumors 
that have driven up borrowing rates to which Greece is 
subject in international markets, taking little government 
(current and previous) ownership for the events and actions 
-- or lack of actions -- that have brought Greece to its 
current difficulties.  End Summary. 
 
------------------------- 
The Minister's Background 
------------------------- 
 
(2) (SBU) The Ambassador expressed his congratulations and 
desire to continue a cooperative relationship with the 
Ministry, and indicated that stabilizing the global economy 
is one of President Obama's top priorities.  He and the 
Minister agreed that the economic crisis is a global problem 
requiring a global solution.  The Minister, who is an 
electrical engineer by training and most recently held the 
position of Deputy Minister in the Ministry, stated that as a 
former President of the Athens Chamber of Commerce, his 
background is on the business and micro side of economics. 
 
--------------------------------------------- ---- 
EcoFin Meetings and Problems Facing Greek Economy 
--------------------------------------------- ---- 
 
(3) (SBU)  The Minister indicated that the EcoFin meetings in 
Brussels during the week of February 9 went well, but it is 
not yet clear whether the EU will place Greece and other 
countries under EC monitoring for failure to hold their 
fiscal deficits under the Stability and Growth Pact target of 
3 percent of GDP.  The Minister insisted that there is no 
danger of Greece leaving or being ejected from the EMU as a 
result of its fiscal deficit and high level of public debt. 
He said that this view was echoed by all EC officials at the 
EcoFin meetings.  Papathanasiou went on to say that despite 
the public's focus on Greece's fiscal deficit (which the GoG 
projects to hold in 2009 at the 2008 level of 3.7 percent of 
GDP), the main problem facing the Greek economy today is an 
increase in borrowing costs which have compounded an already 
high level of public debt (the second highest in the EU, 
coming in at 94.6 percent of GDP in 2008 and projected by the 
GoG to reach 96.3 percent of GDP in 2009).  He stated that 
until recently, the level of debt was not such an important 
issue.  Since the financial crisis hit, however, the spreads 
Greece is charged to borrow in the international capital 
markets have spiked.  Papathanasiou believes these spreads 
are unjustified solely on the basis of Greece's level of 
debt.  In his opinion, the press has purposefully exacerbated 
divergence in the spreads by focusing on a series of negative 
events, including the December riots and the recent protests 
by farmers, and thereby creating an impression that Greece is 
in crisis and unable to service its current debt or to issue 
new debt. 
 
(4) (SBU) Quite to the contrary, the Minister told the 
Ambassador, Greece faces no problems with borrowing on 
international markets.  Year-to-date, the GoG already has 
raised over 40 percent of its 2009 financing needs in the 
debt markets.  (Note: According to the GoG's 2009 budget, 
Greece must borrow approximately 42 billion euros in 2009 to 
finance its budget.  Thus far, the GoG has raised the 
following: (1) 2.55 billion euros from a January 13 auction 
of short and medium-term bank notes; (2) 5 billion euros from 
a January 19 issuance of a syndicated 5-year bond; (3) 2.8 
billion from a late-January private bond placement; and (4) 7 
billion euros from a February 10 issuance of 3-year bonds. 
 
ATHENS 00000216  002.2 OF 003 
 
 
It would appear that the GoG is front-loading its borrowing 
program, with the expectation that its spreads will continue 
to deteriorate over the course of the year.  End Note.) 
While the Minister acquiesced that yield spreads on Greek 
bonds versus German government notes of similar maturity are 
higher (for example, the February 10 3-year bonds were sold 
to yield 249.2 basis points more than comparable German 
bonds), he emphasized that the interest rate on these bonds 
was 14 basis points lower than on similar bonds issued by 
Greece in June 2008. (Note: While true, interest rates in 
general have decreased as a result of cuts in rates by 
central banks.  The spread between bonds, therefore, is a 
more important indication of the market's assessment of risk 
of one instrument verus another as opposed to interest rates 
on bonds issued today versus those issued several months ago. 
 End Note.) 
 
--------------------------------------------- --------------- 
GoG's Revised Projections and New Budget Measures in the SGP 
--------------------------------------------- --------------- 
 
(5) (SBU)  The Minister highlighted for the Ambassador the 
GoG's revised projections for GDP growth and the fiscal 
deficit.  (Note: The previous Minister was widely criticized 
in the Greek and international press and by economic analysts 
for making projections in the 2009 budget, passed by 
Parliament in December, that seemed to be detached from the 
reality of the financial crisis and its impact on the Greek 
economy.  End Note.)  The new GoG projection for GDP growth 
in 2009 is 1.1 percent (down from 2.7 percent in the December 
budget).  Papathanasiou believes this is a far more credible 
target than the European Commission's (EC) projection of 0.2 
percent.  While he did not specify how he thought this target 
could be achieved, he indicated his belief that the EC's 
target lacked a strong analytical basis.  (Note: Recently, 
the Bank of Greece, Greece's central bank, has indicated it 
finds the GoG's 1.1 percent projection unrealistic, and 
believes a 0.5 percent growth rate for 2009 is more 
attainable in light of the global slowdown.  End Note.) 
 
(6). (SBU)  The revised projection for the fiscal deficit in 
2009 is 3.7 percent of GDP (up from 2.0 percent in the 
December budget and the same as that of 2008).  According to 
the Minister, containing the fiscal deficit is the Prime 
Minister's and his Ministry's top priority.  He believes the 
3.7 percent target will be achieved by implementing measures 
included in the updated SGP to improve revenue collection and 
to cut expenditures.  SGP revenue collection measures 
highlighted by Papathanasiou include an increase in the 
special tax on alcoholic beverages and cigarettes and 
simplification of the real property tax.  SGP spending cuts 
highlighted by Papathanasiou include a 10 percent cut to all 
discretionary items in the budget, a 10 percent cut on all 
government contracts, a limitation on new civil servant 
hiring (fewer may be hired than retire), and salary ceilings 
on managers in public enterprises and organizations. 
Altogether, according to the Minister, these cuts give the 
GoG a 500 million euros "cushion" in the budget in the event 
revenues are below target, or additional social programs for 
the vulnerable are needed.  Papathanasiou also indicated that 
the GoG's goal under the SGP is to bring the deficit under 3 
percent of GDP by 2011. 
 
------- 
Comment 
------- 
 
7.  (SBU)  The Minister's tone and rhetoric in public, echoed 
somewhat in the meeting with the Ambassador, seem to lack a 
note of sobriety regarding the impact of the economic crisis 
on Greece.  With daily announcements by governments and 
analysts worldwide projecting dismal outlooks for 2009, it 
seems unrealistic -- quixotic even -- to hint that Greece may 
not be impacted by the crisis as severely as others.  Rather 
than hoping for the best and preparing for the worst, the GoG 
seems to be hoping for the best, preparing for the best -- 
and ignoring the rest.  The Minister makes a plausible case 
that the GoG has developed more realistic targets than those 
outlined in the December budget, is dedicated to containing 
the fiscal deficit, and that the GoG's plan under the SGP can 
help achieve this goal.  The Minister does not, however, seem 
to take into account risks to this strategy and to the GoG's 
projections.  The entire GoG plan seems to hinge on tax 
earnings and cuts to government spending and, as such, is 
subject to a high level of risk as the global economy grinds 
to a "virtual halt," as the IMF has predicted.  There is 
significant risk that government revenues will underperform 
 
ATHENS 00000216  003.2 OF 003 
 
 
in 2009 as they did in 2008, but the GoG's SGP projects 
stronger tax earnings and a billion euros in earnings from 
privatizations of various entities, including those like 
Olympic Airways and the Thessaloniki port that have failed 
thus far to garner significant international financing.  On 
the expenditure cutting side, the government seems to be 
doing more adding than subtracting.  Since the mid-January 
cabinet reshuffle that brought Papathanasiou to his new 
posting, the Embassy's back of the envelope tally indicates 
that the GoG has committed over 2 billion euros in new 
programs, some of which have been politically motivated (see 
reftel).  It would appear most of these funds are being 
offered without budgetary offsets, calling into question how 
concrete the SGP is and whether the GoG can really live up to 
its fiscal deficit target. 
 
8.  (SBU) Moreover, the fact that the Minister portrays 
Greece as a victim of unfair rumors in the press that have 
helped exacerbate Greece's costs of borrowing gives one the 
impression that this government is not taking ownership of 
Greece's economic difficulties.  Certainly, the December 
riots and other signs of civil unrest may have contributed to 
a widening yield spread between Greek and German state bonds, 
but the ultimate factors are an increasing fiscal deficit and 
a huge national debt -- two issues to which this and previous 
governments paid only lip service in the years preceding the 
financial crisis.  We fear that this reluctance to take 
ownership, coupled with overly optimistic statements in the 
press, could give the markets the impression that this 
government is not serious about fiscal discipline and further 
structural reforms.  In the end, this impression will simply 
exacerbate Greece's problems.  End Comment. 
SPECKHARD