VZCZCXRO8672
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHPOD RUEHROV RUEHSR
DE RUEHTH #0371/01 0831541
ZNR UUUUU ZZH
R 241541Z MAR 09
FM AMEMBASSY ATHENS
TO RUEHC/SECSTATE WASHDC 3411
INFO RUCNMEU/EU INTEREST COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHIK/AMCONSUL THESSALONIKI 2058
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 05 ATHENS 000371 
 
SIPDIS 
SENSITIVE 
 
PASS TO TREASURY/IA: LUKAS KOHLER & JEFFREY BAKER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ECIN PREL GR
SUBJECT: GOG IMPLEMENTS THIRD ROUND OF AUSTERITY MEASURES 
IN AN EFFORT TO CONTAIN PUBLIC FINANCES AND BOOST 
CONFIDENCE, BUT WILL THEY BE ENOUGH? 
 
REF: A. ATHENS 339 
     ¶B. ATHENS 216 
     ¶C. ATHENS 176 
     ¶D. 2008 ATHENS 1655 
     ¶E. 2008 ATHENS 1515 
 
ATHENS 00000371  001.2 OF 005 
 
 
------- 
Summary 
------- 
 
¶1. (SBU) In a move to boost market and EU confidence in the 
government's commitment and ability to contain public 
finances, the GoG on March 18 implemented a third series of 
measures to cut spending and boost revenues, including a wage 
freeze affecting approximately 70 percent of public sector 
employees and special, one-time taxes on high-income earners. 
 The EU and various domestic and international economists had 
expressed skepticism that two previous rounds of GoG measures 
would have an appreciable impact on Greece's burgeoning 
deficit (which many economists believe could climb as high as 
5 percent of GDP in 2009, even without a significant GoG 
stimulus package).  While the new measures are certain to 
result in budgetary savings, given the GoG's unrealistic 2009 
revenue and expenditure targets and recent increases in 
expenditures (see reftels B and C), it remains unlikely that 
they will be enough for the GoG to meet its deficit target 
(3.7 percent of GDP) and halt the reversal of the downward 
trend in public debt (projected by the GoG to increase for 
the first time in several years from 94.6 percent of GDP in 
2008 to 96.3 percent in 2009). 
 
¶2. (SBU) Furthermore, it remains unclear whether the move 
will have the desired effect of building market confidence 
and thereby decreasing the spread on yields between Greek and 
German ten-year bonds (currently hovering at around 270 basis 
points).  As for the EU, Luxembourg Prime and Finance 
Minister and the head of the Eurozone group of finance 
ministers, Jean-Claude Juncker, over the weekend commended 
the GoG for the measures but emphasized the government must 
do more to cut its budget deficit in 2009 and to "undertake a 
thorough restructuring of the economy."  What may be clearer 
is that the wage freeze will further dampen public support 
for Prime Minister Karamanlis' government, which steadily has 
been losing ground in opinion polls to opposition PASOK. 
Public servants have vowed to unite in solidarity against the 
GoG's measures by participating in a general strike already 
called for on April 2.  Outraged public servants and 
high-income earners, a one-seat majority in Parliament, and 
the opposition PASOK party with a roughly 4 percent lead in 
public polling does not seem to be a recommended cocktail for 
winning hearts and minds.  End Summary. 
 
--------------------------------------------- -------- 
Measures, on Top of Measures, on Top of More Measures 
--------------------------------------------- -------- 
 
¶3. (U) On March 18, the Karamanlis government implemented a 
third round of austerity measures aimed at reining in public 
spending.  This time, the government hit two areas that 
public pundits had decreed a third rail in the event 
Karamanlis wanted to call early elections this spring: a 
freeze on public wages and special, one-time taxes on 
high-income earners.  Indeed, in 12-13 March meetings, 
Secretary General for Finance Ioannis Sidiropoulos and 
Secretary General for Fiscal Policy Ioulia Armagou told 
EconOff and U.S. Treasury representatives, Jeff Baker and 
Lukas Kohler, that public sector wage freezes were not on the 
table at this time.  The new measures announced by Minister 
of Finance Papathanasiou include: 
 
     (a) A freeze on salaries of public sector employees and 
pensioners earning more than 1,700 euros/month (estimated to 
affect approximately 70 percent of civil servants -- which 
make up about 22 percent of Greece's labor force -- and 50 
percent of civil service retirees); 
 
     (b) A one-off tax levy in 2009 of 1,000 euros for those 
with incomes over 60,000 and up to 80,000 euros; 2,000 euros 
for incomes ranging from 80,000 to 100,000 euros; 3,000 euros 
for incomes ranging from 100,000 to 150,000 euros; and 4,000 
euros for those with incomes over 150,000 euros/year (based 
on tax declarations, this will affect about 128,000 Greek 
taxpayers); 
 
 
ATHENS 00000371  002.2 OF 005 
 
 
     (c) A cap of 12,000 on new hires in the public sector 
this year (despite 21,500 civil servant retirees last year), 
all of whom will receive lower salaries and fewer benefits; 
and 
 
     (d) A symbolic 5 percent tax hike for members of 
Parliament. 
 
At the same time, in order to support those with lower 
incomes, the GoG announced: 
 
     (a) A one-off bonus of 300 euros for public servants 
earning between 1,500 and 1,700 euros/year and public service 
retirees earning between 800 and 1,000 euros/month (estimated 
to affect 10 percent of civil service and 20 percent of civil 
service pensioners); and 
 
     (b) A one-off bonus of 500 euros for public servants 
earning less than 1,500 euros/month and civil service 
pensioners earning monthly pensions less than 800 euros/month 
(estimated to affect 20 percent of civil servants and 30 
percent of civil service pensioners). 
 
¶4. (U) The GoG resorted to these unpopular measures because 
two previous rounds of budget austerity measures had not had 
the desired effect of increasing confidence in the GoG's 
budget program.  The first round of measures, announced in 
early February, included some 350 million euros in higher 
cigarette and alcohol taxes, a 500 million euros cut in 
discretionary spending (e.g., cuts in civil servant travel 
budgets, etc.), as well as measures to cut waste at 
state-owned companies and hospital.  (Note: This set of 
measures was accompanied by an updated Stability and Growth 
Program, or SGP, that revised the wildly optimistic targets 
projected in the 2009 budget passed by Parliament in December 
(see reftel D).  In the update, GDP growth for 2009 was 
revised down from 2.7 percent of GDP to 1.1 percent, and the 
budget deficit was revised up from 2 percent of GDP to 3.7 
percent (see reftel B).  End Note.)  Despite the revised 
targets and the initial measures, the European Commission 
(EC), international and domestic economists, and the markets 
continued to express severe doubt in the GoG's ability to 
control public finances and achieve its new targets.  For its 
part, in mid-February, the EC commenced the Excessive Deficit 
Procedure (EDP) against Greece for breaching the 3 percent 
cap of the budget deficit.  In response, in late February, 
the GoG announced a second set of measures aimed at reducing 
the deficit, including a 10 percent reduction in ministerial 
discretionary spending (estimated to be only 14 percent of 
the GoG budget), a ceiling on executives' salaries in 
state-owned companies, a limitation on the board size of 
state-owned companies, a reduction of the "costs of 
bureaucracy" by 25 percent, and "enhanced controls" against 
tax evasion. (Note: The cut in discretionary spending in the 
second package of measures is the same action addressed in 
the first set, and which the GoG estimates will result in 
savings worth 500 million euros.  End Note.) 
 
--------------------------------------------- ------ 
Impact on the Budget & Fiscal Deficit: Clear as Mud 
--------------------------------------------- ------ 
 
¶5. (SBU)  It is difficult to say what the actual impact of 
all these measures will be on the budget and on the fiscal 
deficit, given that the GoG ha not revised the actual 2009 
budget submitted to and passed by Parliament in December 2008 
(see reftel D).  That budget forecast revenues at 64.2 
billion euros and expenditures at 66 billion euros (with a 
2.0 percent general government budget defiit).  Optimistic 
to begin with, with a revised budget deficit of 3.7 percent 
and three sets of cost-savings measures implemented since the 
December budget passed, these numbers clearly are no longer 
accurate.  According to government estimates, the various 
measures will esult in the following budgetary savings or 
additional revenues: 
 
     (a) Savings/revenues from first set of measures: at 
least 350 million euros (new taxes). 
     (b) Savings/revenues from second set of measures: at 
least 500 million euros (from the discretionary spending 
cuts). 
     (c) Savings/revenues from third set of measures: between 
650 million t 850 million euros (both taxes and wage freeze). 
 
 
ATHENS 00000371  003.2 OF 005 
 
 
The MoEF believes that savings and revenues will be higher, 
since some of their measures target improved tax collection 
and efficiency gains from improved government operations. 
Given the GoG track record in these areas and the fact that 
the GoG does not appear to back up its new measures with 
teeth, the savings/revenues from these types of actions seem 
far less quantifiable and achievable.  For example, the GoG 
expects it will receive an extra 1.8 billion euros in tax 
revenues from settlement of debts due the state.  But this 
sum originally was supposed to have been collected in 2008, 
and the GoG does not appear to have put in place any measures 
that make its collection more likely in 2009.  Also, 
regarding the 10 percent cut in discretionary spending (to 
yield 500 million euros in savings), the GoG has no system in 
place in ensure this occurs or penalty in the event it does 
not.  (Note: During a March 13 meeting with EconOff and U.S. 
Treasury representatives, MoEF SecGen Armagou indicated that 
the only measure taken by the GoG to ensure this cut is 
affected is a letter from the Minister of Finance to his 
fellow Ministers.  Furthermore, Armagou indicated that 
currently, the GoG has no way to force Ministries to stick to 
their original budgets, let alone enforce the envisaged cuts. 
 End Note.) 
 
¶6.  (SBU) Moreover, the December numbers also do not reflect 
additional costs to the budget of recent GoG measures to 
support pensioners, the unemployed, and the vulnerable (see 
reftels B and C), including the one-off bonuses outlined 
above.  The National Bank of Greece (NBG), Greece's largest 
private bank, estimates the total sum of government support 
measures to date at well over 2 billion euros, or 
approximately 1 percent of GDP. 
 
¶7.  (SBU) More clear than the impact of the measures on the 
fiscal deficit is that the GoG's growth forecast of 1.1 
percent of GDP (or 0.5 percent in their worst case scenario) 
continues to be irreconcilable with the realities of the 
global downturn.  (Note: SecGen Armagou told EconOff and U.S. 
Treasury reps that the GoG forecasts 3.7 percent for the 
fiscal deficit whether GDP growth is 1.1. percent or 0.5 
percent (the GoG's current worst case scenario).  End Note.) 
Given that the Eurozone's growth forecast has been downgraded 
across the board to -2.6 percent, it is becoming more likely 
that Greece's growth will be closer to zero or slightly 
negative in 2009.  Major downturns are expected in 2009 in 
Greece's key GDP drivers (tourism, shipping, and 
construction).  In addition, according to both Sidiropoulos 
and Armagou, the government had been counting on consumption 
(largely driven by healthy public sector wage increases on 
the order of 8-9 percent) to help maintain GDP growth in 
¶2009.  The recent wage freeze will put a dent in this 
expectation, adding another drag to GDP growth.  In light of 
more realistic GDP growth forecasts (0 percent to -1.0 
percent), the fiscal deficit is more likely to fall in the 
range of -4 to -6 percent of GDP. 
 
 
-------------------------------------------- 
The EU and Markets: Thanks But We Need More! 
-------------------------------------------- 
 
¶8. (SBU) Despite the recent measures, the EU continues to 
urge Greece to do more to improve its finances.  Luxembourg 
Prime and Finance Minister and the head of the Eurozone group 
of finance ministers, Jean-Claude Juncker, on March 22 
emphasized the government must do more to cut its budget 
deficit in 2009 and to "undertake a thorough restructuring of 
the economy."  When the EC announced in mid-February that it 
was commencing the EDP process against Greece, it pointed out 
that Greece's excess over the 3 percent fiscal deficit cap is 
not a temporary response to the global crisis, but rather a 
failure to undertake sufficient fiscal consolidation efforts 
when economic conditions were more favorable.  In a stern 
message, the Commission pointed out that Greece's fiscal 
imbalances are rooted in "insufficient control of public 
expenditures, overoptimistic revenue projections and 
structural and endemic problems related to the recording of 
Greek government accounts."   Measures the EU and Bank of 
Greece (Greece's central bank) Governor George Provopoulos 
have strongly recommended the GoG undertake include: 
 
     (a) implementing permanent measures to curb 
expenditures, including a prudent public sector wage policy 
(i.e. one that keeps wage growth at or near inflation 
 
ATHENS 00000371  004.2 OF 005 
 
 
expectations but below productivity gains), thereby 
contributing to a reduction in the debt-to-GDP ratio; 
 
     (b) ensuring fiscal consolidation has the goals of 
enhancing the quality of public finances and addressing 
external imbalances; 
 
     (c) implementing reforms to make tax administration and 
the budgetary process transparent and subject to mechanisms 
that monitor, control, and improve expenditure efficiency; and 
 
     (d) implementing further reforms of the pension and 
healthcare systems, with an eye towards making them 
sustainable in the long-term. 
 
In short, the EU is not impressed with the GoG's limited 
adjustment measures thus far and wants to see more actions 
that both contain public finances in 2009 and put Greece on 
the path of long-term sustainability.  The only question 
remaining now is the deadline Greece will be given by which 
to bring its fiscal deficit under the 3 percent cap: 2010 or 
¶2011. 
 
¶9. (SBU) If the spreads between Greek sovereign 10-year bonds 
and German bunds are a proxy for the market's reaction to the 
GoG's measures, then it would appear the actions fell on deaf 
ears.  While spreads likely reflect more than just the 
market's views of Greece (i.e. some portion is due to general 
high risk aversion, and some is due to desire for more liquid 
instruments as reflected in lower spreads), Greek spreads 
continue to hover around 260-70 basis points, with very 
little narrowing observed following the GoG's announcement. 
It may be that as with the EU, markets want more concrete and 
long-term actions, as well as more realistic forecasts by the 
GoG.  (Note: Senior economists and bank officials at 
Eurobank, Alphabank, and NBG uniformly noted to EconOff and 
visiting Treasury representatives on March 12 that a key 
action the GOG could take to boost their confidence in the 
GoG's commitment to containing public finances was to freeze 
public wages.  End Note.) 
 
---------------------------------- 
. . . And the Opposition Says . . . 
---------------------------------- 
 
¶10. (SBU) George Papandreou, the leader of opposition PASOK, 
moved quickly to undercut the GoG's claims that the wage 
freeze and tax hikes are evidence of fiscal responsibility, 
given the political cost.  Papandreou argues that Greece 
needs more flexibility under the Stability Pact, but at the 
same time, he claims that if PASOK was in power, he would 
increase taxes on the wealthy and on banks in order to narrow 
the fiscal deficit.  These comments seem to highlight that he 
has no better plan than the GoG to put Greece's public 
finances in order. 
 
------- 
Comment 
------- 
 
¶11. (SBU) It is clear that the GoG has not fully come to 
terms with the likely impact of the crisis on Greek growth 
and the fiscal deficit.  As Financial Times International 
Affairs Editor Quentin Peel put it to Nobel-prize winning 
economist Paul Krugman during a March 18 panel discussion in 
Athens on the global financial crisis and its impact on the 
Greek economy: "I told you Paul, these people are in denial!" 
 Despite expected sharp downturns in shipping and tourism 
(which combined make up approximately 25 percent of Greece's 
GDP), increasing negative growth forecasts in the EU and 
Eurozone (to which Greece exports approximately 50 percent of 
its goods and services), the government is planning for 
positive growth and limiting its adjustments to achieve its 
fiscal deficit target of 3.7 percent of GDP.  The government 
seems to think hat because Greece has had higher than 
EU-average growth the past few years and because its banks 
had no exposure to "toxic debt," the Greek economy is inured 
from the global slowdown.  It is not clear when and if 
reality will pervade, but the GoG's current strategy of 
throwing out a bone here and there will only succeed in 
wasting time and narrowing the GoG's policy choices.  The 
longer the GoG waits to affect substantive reforms that win 
over both the EU and the markets, the more drastic the 
austerity measures it eventually will need to adopt.  After 
 
ATHENS 00000371  005.2 OF 005 
 
 
all, the impact of the criss on Greece's real economy will 
only become mre evident (not to mention worse) during the 
course of the year.  And the longer its takesthe GoG to act, 
the more time it will add ontoits eventual recovery path, 
given the structual constraints the Greek economy already 
faces. 
 
¶12. (SBU) Nonetheless, it is a very positive sign that the 
GoG implemented a public sector wage freeze.  During the 
March 18 conference on the global financial crisis, Paul 
Krugman noted for the audience that a key reform the GoG 
needed to undertake was to contain its real wage growth in 
order to become more compeitive vis-a-vis its trading 
partners.  If this freeze can be incorporated into a broader 
wage policy, the GoG may have the seeds of a broader reform 
program.  But economics aside, the Karamanlis government's 
action has not been well received by the public, which is 
using the action to build support for the next general strike 
on April 2.  While the fact that the government implemented 
such a vilified reform may be a sign that it is getting more 
realistic, its failure once again to create public consensus 
prior to the implementation of a much-needed reform does not 
bode well for the popularity of the Karamanlis government, 
which has been roughly four percentage points behind 
opposition PASOK in polling for the last several months.  End 
Comment. 
McCarthy