VZCZCXYZ0000
RR RUEHWEB

DE RUEHTH #1583/01 3001515
ZNR UUUUU ZZH
R 271515Z OCT 09
FM AMEMBASSY ATHENS
TO RUEHC/SECSTATE WASHDC 0906
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS ATHENS 001583 
 
SENSITIVE 
SIPDIS 
DESK PASS TO U.S. TREASURY - LUKAS KOHLER 
DESK PASS TO STATE/EUR/ERA - MATTHEW BEH/JONATHAN KESSLER 
DESK PASS TO STATE/EEB/OMA - JOHN C. KELLEY 
 
E.O. 12958: N/A 
TAGS: ECON ECIN PREL GR EFIN
SUBJECT: SENIOR GREEK BANKER COMMENTS ON GREEK ECONOMY, NEW 
GOVERNMENT, BANK HEALTH 
 
REF: A. ATHENS 1581; B. ATHENS 1451; C. ATHENS 371; D. ATHENS 339 
¶E. ATHENS 216; F. ATHENS 176; G. 08 ATHENS 1655; H. 08 ATHENS 1515 
 
---------------- 
 
SUMMARY 
 
---------------- 
 
 
 
¶1. (SBU) In a recent conversation with DepEconCouns, Nikolaos B. 
Karamouzis, the Deputy Chief Executive Officer of Eurobank EFG, 
Greece's second largest private bank in terms of both deposits and 
assets, discussed his views on Greece's economic and budget 
situation, the new PASOK government and its reform capacity, and 
the strength of Greeks banks.  Karamouzis, a self-proclaimed PASOK 
supporter and an American-educated economist who also has served as 
a Deputy CEO at the National Bank of Greece and a staff economist 
at the Bank of Greece (Greece's central bank), indicated the new 
government has inherited an economy on the brink of collapse and 
has very few options open to it to rein-in public finances and very 
little time to act before capital markets and the EU respond 
punitively.  While major expenditure cuts are needed, Karamouzis is 
not optimistic that the new government has the capacity and 
willingness to undertake such measures.  In his mind, the new 
government has 100 days to prove to Greek citizens and 
international markets that it has the capacity and willingness to 
implement painful reforms.  But he believes that PASOK already lost 
a key opportunity when it failed to act quickly and decisively to 
end the 16-day strike by dockworkers opposed to the privatization 
of the Piraeus port (see reftel A).  Karamouzis applauded 
Papandreou's decision to carve the Ministry of Finance from the 
Ministry of Economy, but he believes that the lines of authority 
have not been clearly delineated, which he believes will lead to 
conflict and confusion in the management of economic policy - 
something Greece can ill afford.  Finally, on the health of Greek 
banks, Karamouzis asserted that with the "life-saving" 
interventions by the IMF in countries like Bulgaria and Romania, 
concerns about Greek bank subsidiaries in the Balkans were 
receding.  Concerns about bank operations in Greece, however, were 
still high, since the impact of the crisis was only now beginning 
to be felt in the real economy.  End Summary. 
 
 
 
--------------------------------------------- ---------------------- 
--------------------------------------------- ------- 
 
THE GREEK ECONOMY: TWIN CHALLENGES OF DEFICIT AND DEBT; GROWTH 
PROSPECTS 
 
--------------------------------------------- ---------------------- 
--------------------------------------------- ------- 
 
 
 
¶2. (SBU) Karamouzis indicated in a recent conversation with 
DepEconCouns that dealing with Greece's twin deficits (e.g., the 
budget deficit and the public debt) is the most urgent and acute 
challenge facing the new government.  He projects that public debt 
will reach almost 300 billion euros, or 115 percent of GDP, by the 
end of 2009 (according to new GoG data, the debt in 2008 was 99.2 
percent of GDP; for 2009 through end-June, the level of debt had 
increased to 111.5 percent of GDP).  The size of the interest 
component alone (12 billion euros for 2009) is challenging the 
government's ability to service it without resorting to further 
borrowing.  [Note: A key factor in assessing whether a country's 
debt burden is sustainable is whether it can service the annual 
interest coming due without borrowing more and thereby adding to 
the debt load.  End Note.]  Rising interest rates, which are almost 
certainly around the corner in Karamouzis's view, will aggravate 
Greece's ability to continue to service this debt without continued 
borrowing. 
 
 
 
¶3. (SBU) Karamouzis regards narrowing the budget deficit as crucial 
 
 
if Greece is to continue to be able to service this debt and, 
ultimately, get on the path towards reducing it.  Karamouzis 
explained that to comply with the 3 percent deficit cap under the 
EU's Growth and Stability Pact (SGP), Greece will need to find 
budgetary savings on the order of 18-20 billion euros over the next 
three years.  Karamouzis underscored that because the government's 
new 2009 deficit projection (12.5 percent of GDP, or approximately 
30 billion euros) was over half of the expected 2009 revenue base 
of 50-60 billion euros, finding these savings could not come from 
additional taxes alone.  The government will need to implement 
major spending cuts in addition to improving tax collection and 
tackling tax evasion. 
 
 
 
¶4. (SBU) Karamouzis believes that the economy will shrink this year 
by approximately 1.5 percent (GoG projects the same), despite 
factors that have supported demand and growth (e.g., a large budget 
deficit exacerbated by government spending and 2 percent growth in 
nominal wages).   Notwithstanding a potentially strong recovery in 
the EU next year, he forecasts that the Greek economy will shrink 
again in 2010 by 0.5 to 1 percent as a result of flat real wages, a 
continued deceleration in credit, and the measures that the GoG 
must take to shrink the deficit. 
 
 
 
--------------------------------------------- ------------------ 
 
IS THE NEW GOVERNMENT UP TO THE TASK? 
 
--------------------------------------------- ------------------ 
 
 
 
¶5. (SBU) Karamouzis, who is a self-proclaimed PASOK supporter and 
claims he has close ties with many in the new government (including 
the Minister of Finance Giorgos Papakonstantinou and Minister of 
Citizens' Protection Michalis Chrysochoidis), is hoping for the 
best, but he sees a very difficult road ahead and increasingly 
limited options for the government.  He regards this as the most 
difficult economic environment that Greece has faced in over 50 
years, and it will require years of persistent, focused, and 
unpopular policies.  PASOK, Karamouzis believes, has a very limited 
window of opportunity in which to act to convince Greek citizens 
and the markets that it is committed to undertaking serious public 
finance and structural reforms.  In his opinion, the context in 
which the GoG acts will become increasingly constrained for several 
reasons: (1) a high level of frustration and low level of patience 
among people as a result of the lack of action taken by the 
previous government; (2) intensifying calls from the EU for 
immediate reforms; (3) weakening bargaining power with labor 
unions, as the Communist Party of Greece (KKE) and SYRIZA seek to 
foment and take advantage of labor union discontent; and (4) 
increasing social discontent as people feel more personal impact 
from the crisis.  If PASOK does not act decisively in the first 100 
days, Karamouzis fears the government will lose popularity, the 
economic environment will continue to deteriorate, and it will be 
all the more difficult to sell reforms to an angry and disheartened 
public. 
 
 
 
¶6. (SBU) While the new PASOK government has stated that it intends 
to narrow the budget deficit to a single digit in 2010 through a 
combination of measures, including aggressively fighting tax 
evasion, cutting spending and increasing taxes on only the wealthy, 
Karamouzis is not optimistic that PASOK will have the political 
room or willingness to implement these measures.  He believes that 
spending cuts will be fought hard by PASOK traditionalists' desire 
to play to the party's established constituencies like labor and, 
in particular, the civil service.  On tax evasion, he is not 
certain the GoG has the resolve and the technical capacity to solve 
the prolific problems that contribute to it.  Finally, Karamouzis 
believes that there will be strong pressure to resort to additional 
taxes if it becomes increasingly clear that the other measures are 
simply too difficult to effect. 
 
 
 
--------------------------------------------- ---------------------- 
--------------------- 
 
 HANDLING OF THE PORT STRIKE: PORTENT OF THINGS TO COME? 
 
 
--------------------------------------------- ---------------------- 
--------------------- 
 
 
 
¶7. (SBU) Karamouzis stated that he was disappointed by the GoG's 
handling of the recent strike by Port of Piraeus dockworkers 
protesting the privatization of the port's management to 
Beijing-based China Ocean Shipping Company (COSCO) Pacific (see 
reftel A).  While he understands that Prime Minister Papandreou 
promised during the election campaign to reexamine various 
privatization deals negotiated by the previous government in order 
to gain the support of labor unions, he believes this rhetoric 
backfired on PASOK.  In his opinion, it created an air of 
expectation and galvanized dockworkers to go back on strike 
(following months of relative quiet) with the aim of forcing the 
new government to abrogate the COSCO deal.  Now that PASOK is in 
office, campaign rhetoric aside, Karamouzis would have liked to see 
PM Papandreou prioritize the needs of the Greek economy and all 
Greek citizens above the selfish demands of one small group.  By 
acting quickly and decisively to quash the strike (Karamouzis did 
not suggest how the GoG might have done so), Papandreou could have 
shown investors that contract rights and foreign direct investment 
(FDI) were respected and supported.  Karamouzis expressed concern 
that companies looking to invest their dwindling resources will 
interpret the GoG's actions as not business-friendly and decide 
against investing in Greece at a time when Greece desperately needs 
FDI to help it recover from the global financial crisis. 
 
 
 
¶8. (SBU) Karamouzis also fears the "tentative" way the GoG dealt 
with a strike that had paralyzed Greece's busiest seaport and cost 
the Greek economy millions of euros a day plays right into the 
hands of other labor groups looking to exploit the GoG's pro-labor 
leanings.  Karamouzis gave as an example a series of upcoming 
strikes by bank labor unions, which are seeking to force the 
government to enter into a collective bargaining agreement for 
automatic wage hikes.  [Note: Collective wage agreements, which 
unite different unions seeking various benefits like wage increases 
against the GoG, are common in Greece.  They often weaken the GoG's 
bargaining position by forcing it to deal with an entire sector's 
employees as a block versus dealing with each union on an 
individual basis.  The IMF and others point to these collective 
agreements as a key constraint to improving competitiveness, as 
they lead to wage hikes above the rates of inflation and 
productivity.  End Note.]  Unless PASOK gets tough on labor unions 
and their demands immediately, Karamouzis expressed fear that the 
KKE and SYRIZA will use labor discontent to challenge and goad 
PASOK to live up to its socialist ideals, making it more and more 
difficult for PASOK to achieve its stated reforms.  This could 
reach a head by December, as Greece approaches the one-year 
anniversary of the shooting death by police of a teenager and the 
riots that followed. 
 
 
 
--------------------------------------------- -- 
 
THE NEW ECONOMIC MINISTRIES 
 
--------------------------------------------- -- 
 
 
 
¶9. (SBU) Karamouzis applauded PM Papandreou's move to separate the 
Ministry of Finance from the Ministry of National Economy and to 
create a new Ministry of Economy, Competitiveness and Merchant 
Marine.  He is concerned, however, that the lines of authority have 
not been clearly delineated.  According to Karamouzis's discussions 
with senior members of the government, Minister of Finance Giorgos 
Papakonstantinou will be responsible for revenues and spending, 
taxation policy, dealings with international institutions like the 
IMF and the European Commission, the finances of Greek state 
organizations, debt management, the stock exchange and banks, and 
overall economic policy.  His GoG interlocutors have told him that 
the new Ministry of Economy is supposed to function like the U.S. 
Department of Commerce, with its new head, Louka Katseli, 
responsible for trade and commerce, competition policy, antitrust 
issues, and shipping issues.   This division will only work, 
according to Karamouzis, if the two new ministers have good 
cooperation.  Karamouzis shared frankly with DepEconCouns that the 
two Ministers in question are known to collide on a personality and 
 
 
policy basis.  According to Karamouzis, it is well known within 
PASOK that Katseli expected to become the "economy czar," with a 
range of power and responsibilities similar to that of her husband, 
Gerasimos Arsenis, who was the Minister of Economy and Finance and 
head of Greece's central bank in the early 1980s under PM Andreas 
Papandreou.  Karamouzis thinks that PM Papandreou made the right 
choice in making Papakonstantinou responsible for the most 
important part of economic policy.  He is viewed, according to 
Karamouzis, as more free-market minded, friendlier to investors, 
and more favorably by capital markets and ratings agencies. 
Katseli, on the other hand, Karamouzis indicated, is viewed as 
supporting more pro-labor and populist economic policies. 
Karamouzis stated that Katseli is supposed to have an undefined 
role in advising PM Papandreou on economic policy - a situation 
which he believes will create conflict and confusion in the 
management of economic policy - both of which Greece can ill afford 
at this crucial time. 
 
 
 
--------------------------------------------- ---------------------- 
------ 
 
BANKS: PASOK POLICIES TOWARDS; GENERAL HEALTH 
 
--------------------------------------------- ---------------------- 
------ 
 
 
 
¶10. (SBU)  Despite PASOK's rhetoric while in the opposition and 
during the election to nationalize banks and their profits, 
Karamouzis does not believe PASOK will attempt to intervene in the 
market operation of Greece's banks.  He thinks that, at most, PASOK 
will undertake the following vis-C -vis the banks: (1) impose an 
extra tax on banks' 2009 profits; (2) pass a consumer protection 
law that most banks favor as long as it does not encourage people 
to default on their debts; (3) support bank unions in their demands 
for wage hikes; and (4) merge two state-owned banks (Agricultural 
Bank of Greece, or ATEBank, and Postal Savings Bank) to create a 
state-development bank along the lines of Germany's KfW 
(Reconstruction Credit Institute, formed after World War II as part 
of the Marshall Plan).  Karamouzis believes without a doubt that 
the GoG also will appoint a new head of Greece's largest private 
bank, the National Bank of Greece (NBG).  Karamouzis said that this 
is a tradition given that state pension funds control 17 percent of 
the NBG's stock, and it is not one PASOK is likely to forego. 
[Note: DepEconCouns has heard from two trusted sources at NBG that 
Karamouzis's name is being bandied about as the potential new head 
of NBG.  End Note.] 
 
 
 
¶11. (SBU) On the health of Greek banks in the aftermath of the 
global financial crisis, Karamouzis stated that the sector as a 
whole is doing well.  Most large Greek banks are returning to 
profit, but these are the result more of trading activities in the 
capital markets and less traditional banking (mortgages, consumer 
lending, etc.).  Credit expansion continues to decelerate for 
Greece as a whole, having fallen to 6 percent in August from 6.6 
percent in July.  Concerns over Greek bank subsidiaries in the 
Balkans have abated, according to Karamouzis, largely due to the 
various IMF interventions in the region, particularly in Romania 
and Bulgaria.  Karamouzis indicated that Greek banks today are more 
concerned with the situation in Greece itself than that in the 
Balkans.  This is due to the fact that the real economy in Greece 
has only begun to be hit by the effects of the global crisis. 
Eurobank and other Greek banks are watching non-performing loans 
(NPLs) carefully in Greece, fearing that as the economy continues 
to shrink and unemployment rises, more and more businesses and 
people will not be able to service their loans.  Karamouzis 
outlined that Eurobank's NPL ratio for loans 90 days or more past 
due for the Balkans was deteriorating at a slower pace (6.5 percent 
at the end of the 3Q 2009), while its NPL ratio for Greece was 
beginning to deteriorate at a faster pace (5.5 percent at the end 
of 3Q2009).  [Note:  Eurobank EFG is the second largest bank in 
Greece in terms of both assets and deposits.  It has a banking 
presence in Bulgaria, Serbia, Romania, Turkey, Poland, Ukraine, 
United Kingdom, Luxembourg, and Cyprus.  Its loan-to-deposits ratio 
for the group as a whole at end 2Q2009 was 117 percent, while it 
was 143 percent in New Europe (Balkans, Turkey, Poland, Ukraine). 
The capital position of the group at the end of 2Q2009 is as 
follows: Total Tier 1: 10.2 percent;  Total Capital Adequacy Ratio: 
12.1 percent.  End Note.] 
 
 
------------------- 
 
COMMENT 
 
------------------ 
 
 
 
¶12. (SBU) As a self-avowed supporter of PASOK, Karamouzis's views 
are a sign that the new government has its work cut out for it if 
it is to convince the Greek electorate and markets that it is able 
and willing to take on reforms.  PASOK rhetoric has set the bar 
high regarding public expectations, potentially complicating the 
government's efforts to balance competing priorities. 
Speckhard