VZCZCXYZ0000
RR RUEHWEB

DE RUEHTH #1653/01 3291023
ZNR UUUUU ZZH
R 251023Z NOV 09
FM AMEMBASSY ATHENS
TO RUEHC/SECSTATE WASHDC 1122
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHTH/AMEMBASSY ATHENS

UNCLAS ATHENS 001653 
 
SENSITIVE 
SIPDIS 
DESK PASS TO U.S. TREASURY/IA - JEFF BAKER/LARRY NORTON 
DASK PASS TO U.S. TREASURY/OTA - LARRY MCDONALD 
DESK PASS TO STATE/EUR/ERA - MATTHEW BEH/JONATHAN KESSLER 
DESK PASS TO STATE/EEB/OMA - JOHN C. KELLEY 
DESK PASS TO OMB - ROB GOLDBERG 
 
E.O. 12958: N/A 
TAGS: ECON ECIN PREL GR EFIN
SUBJECT: AMBASSADOR'S CALL ON MINISTER OF FINANCE PAPAKONSTANTINOU 
 
REF: A. 09 ATHENS 1621; B. 09 ATHENS 371 
 
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SUMMARY 
 
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¶1. (SBU) Ambassador Speckhard's November 16 courtesy call on 
newly-appointed Minister of Finance George Papakonstantinou 
underscored the challenges confronting the new Greek government as 
it seeks to shore up deteriorating Greek public finances, bridge a 
credibility gap created by the misreporting of economic statistics 
by previous governments, and maintain popular support by balancing 
politically-difficult reforms with delivering on campaign promises. 
The Minister admitted Greece's economic and fiscal situation is 
dire and will require politically difficult decisions and reforms 
in the coming months.  Chief among his immediate priorities for the 
Ministry will be to address the two key structural impediments to 
improving public finances: an ineffective tax administration system 
and an inadequate budget process.  The Minister asked for technical 
assistance from U.S. tax and budget experts, namely the IRS and 
OMB. 
 
 
 
¶2. (SBU) SUMMARY CONTINUED. Papakonstantinou told the Ambassador 
that his goal is to shrink the deficit from 12.7 percent in 2009 to 
9.4 percent in 2010 through a combination of revenue enhancing (60 
percent) and expenditure reducing (40 percent) measures.  He 
believes the measures he is proposing are not overly ambitious and 
are achievable.  He also acknowledged that budget cuts alone cannot 
solve all of Greece's problems; structural reforms are needed.  To 
this end, he highlighted key reforms the GoG will introduce in the 
coming months, including pension reform, liberalization of closed 
professions, and removal of impediments to investment.  The 
Ambassador stressed that these and other structural reforms were 
fundamental to restoring Greece's competitiveness, and that greater 
reliability and less bureaucracy were critical to improving 
Greece's  investment climate.  The Ambassador also raised bilateral 
issues, including Afghanistan and Pakistan assistance, debt owed to 
U.S. drug and medical suppliers, and the Thessaloniki Jewish 
Cemetery.  END SUMMARY. 
 
 
 
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BROKEN TAX AND BUDGET ORGANS NEED REVAMPING 
 
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¶3. (SBU)  Minister of Finance George Papakonstantinou admitted the 
state of Greek public finances was dire, suggesting broken tax 
administration and budget mechanisms lay at the root of the 
problem.  He described the current taxation system as one that 
allows too many distortionary exemptions and lacks transparency and 
equitable burden-sharing between different professions - factors 
which promote the wide-spread tax evasion pervasive in Greece 
(estimated in the press to be on the order of 30 billion euro 
annually, or about 12 percent of GDP).  He said that his 
predecessors have attempted to address both tax evasion and 
questions of fairness by balancing the level of taxation between, 
for example, employees (e.g., public servants) and the 
self-employed.  In Papakonstanou's view, merely adjusting the rate 
of taxation on direct earnings misses the crux of the issue, namely 
that lack of transparency and poor tax collection mechanisms allow 
people, particularly the self-employed, to underreport their 
earnings.  [Note:  Tax evasion is one of the most important 
contributing factors to Greece's large underground economy, 
according to the OECD which estimates it to be approximately 25 
percent of GDP.  End Note.] 
 
 
 
¶4. (SBU) To overcome the huge problem of evasion, Papakonstantinou 
 
plans to develop a system that makes taxation more fair and 
equitable by forcing people to declare for the first time details 
of their finances and assets beyond just direct employment income, 
including real estate holdings, cars, bank accounts, and 
distributed earnings.  The Ministry will then cross-check this 
information with tax filing forms in order to assess whether people 
are reporting their incomes accurately.  Papakonstantinou also 
plans to introduce legislation that abolishes special exemptions 
for various classes of professionals, like athletes and architects. 
While such measures may be met with opposition from affected 
groups, he believes the measures are defensible because their aim 
is fairness.  [Note: Papakonstantinou did not address how the GoG 
will stand up the systems and mechanisms necessary to monitor and 
cross-check all this information.  Many press reports indicate that 
ratings agencies and other market watchers are skeptical of 
Greece's current tax administration and collection mechanisms, 
largely owing to a lack of qualified tax personnel and computerized 
and automated tax systems.  End Note.] 
 
 
 
¶5. (SBU) Echoing statements made publicly, the Minister emphasized 
that the 2010 budget currently in process is the last if its kind. 
As promised during the election, Papakonstantinou intends to launch 
a full review of the Greek budget process and is looking at how 
different countries like the United States structure their budget 
frameworks.  He said that one problem with the Greek budget 
apparatus is that Greece's General Accounting Office (GAO), which 
is embedded within the Ministry of Finance, lacks independence. 
While the Greek GAO has responsibility for formulating the Greek 
budget and reporting on the costs and benefits of each piece of 
legislation, lack of independence limits its ability to accurately 
assess and report views contrary to GoG statements.  The Greek 
budget process is further complicated by a lack of transparency and 
of checks and balances (e.g., the Congressional Budget Office) that 
would allow for a true public debate and differing perspectives to 
be taken into account.  To underscore the importance of 
independence, transparency and checks and balances, the Minister 
noted the example of the previous government's privatization of 
Olympic Airlines.  He claimed the new government has just 
discovered that the privatization has saddled Greece with a 
not-yet-quantified, but likely large, pension bill for years to 
come.  Finally, the Minister agreed with the Ambassador that Greece 
could benefit from the adoption of a budget framework, similar to 
that which exists in the United States but adapted for Greece's 
Parliamentary system.  Such a framework would include a budget 
resolution that would set annual targets and ceilings on the budget 
and appropriations process. 
 
 
 
¶6. (SBU) Recognizing U.S. expertise in the areas of tax and budget 
policy and enforcement, Papakonstantinou asked Ambassador Speckhard 
for assistance in designing and implementing these reforms.  He 
noted the IRS provided technical assistance to the Ministry in the 
late 1990s.  The Ambassador expressed support, but recommended the 
Minister narrow down the specific areas in which he is interested. 
Papakonstantinou cited taxation of off-shore companies and 
establishing statistical models to help catch tax evaders as two 
key areas of need.  In the budget arena, he welcomed the 
Ambassador's suggestion that meeting with experts at OMB, Treasury, 
CBO and the Congressional budget committees would be a good start 
to determining if the U.S. system could serve as a model.  The 
Minister stated he would be willing to pay for such assistance, and 
the GoG would not care if news of such assistance became public. 
 
 
 
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BUT BUDGET AND TAXATION REFORM ARE NOT ENOUGH . . . 
 
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¶7. (SBU) Papakonstantinou compared Greece's economic problems with 
those of the United States, stating that both countries suffer from 
"twin deficits," or current account and budget deficits.  He 
qualified, however, that unlike the United States, Greece 
unfortunately cannot print currency, and the euro is not the 
world's reserve currency.  Claiming he understands the EU is 
apprehensive that Greece's large budget deficit (projected to be 
12.7 percent in 2009) and increasing public debt (currently over 
115 percent of GDP) are creating systemic risks for the Eurozone, 
the Minister nonetheless expressed frustration with the level of 
criticism aimed at him by the EU and others over Greece's revised 
statistics.  Papakonstantinou stated that his 2010 budget will 
reduce the deficit by 3.3 percent, or 7.8 billion euro, to 9.4 
percent.  Revenue-enhancing measures, including an extraordinary 
tax on the 2008 profits of banks and large businesses and 
collection of overdue taxes, account for 60 percent of the 
reduction, while expenditure cuts and nonrecurring items included 
in the GoG's revised 2009 deficit (e.g., hospital debt formerly not 
recorded on budget) account for the remainder.  He argued that the 
measures he is proposing are not overly ambitious and are 
achievable.  While the EU, ratings agencies and markets are 
pressuring for further cuts, the Minister claimed deeper cuts would 
be irresponsible without a more detailed understanding of 
contractual obligations ministries have made that impact the 
current budget and outyears.  [Note: Approximately 80 percent of 
Greek outlays are considered non-discretionary or mandatory, with 
an estimated 40 percent alone going towards civil service salaries 
and pensions.  In addition, ministries are known to enter into 
contractual obligations without concurrence from the Finance 
Ministry but which obligate the GoG to outyear financing.  End 
Note.]  He added that deeper cuts were not advisable in the face of 
Greece's first recession since 1993.  More importantly, the 
Minister indicated, his hands were tied by election campaign 
promises, including a 2.5 billion euro stimulus package, from which 
the government could not walk away. 
 
 
 
¶8. (SBU) Taxation and budget reforms and budget cuts alone cannot 
solve Greece's problems, according to Papakonstantinou.  Greece 
needs major structural reforms, and Prime Minister Papandreou has 
already commenced or will soon commence public dialogue on many of 
these, including pension reform, deregulating closed or protected 
professions (e.g., notaries and truckers) , and removing 
impediments to domestic and foreign investment.  He believes that 
the GoG must move quickly over the next 6 months, while the 
government's approval ratings are still high and its mandate fresh, 
on these and other key structural reforms.  The Minister hinted 
that a reduction of the public sector may also be in the offing. 
Noting he understood these were the purview of Minister of Economy, 
Competitiveness and Shipping Katseli, the Ambassador stressed thQ 
these and other structural reforms were fundamental to restoring 
Greece's competitiveness.  He underscored that greater reliability 
in the tax structure, adequate judicial recourse for contract 
disputes, and less bureaucracy were critical to improving Greece's 
investment climate (see reftel A). 
 
 
 
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BILATERAL ISSUES 
 
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¶9. (SBU) The Ambassador thanked the Minister for Greece's support 
in Afghanistan and urged continued financial support, particularly 
on the assistance side in both Afghanistan and Pakistan.  He also 
sought Papakonstantinou's assurances that the government would 
honor its debt to U.S. drug companies and medical suppliers. 
Papakonstantinou stated that his Ministry has acknowledged and 
included the debt owed to U.S. and European companies, estimated to 
be approximately 6.2 billion euros, in the 2009 budget and, 
together with the Ministry of Health, has established a process for 
coming to terms with and paying companies owed money.  His goal is 
to complete this process in the next two months; however, he 
indicated ,the GoG is banking on companies accepting a discount off 
of the total face value of debt they are owed, since the GoG would 
pay off the debt at one time.  Finally, the Ambassador raised the 
Thessaloniki Jewish Cemetery restitution issue.  He noted that the 
previous government had approved and tabled a 10 million euro 
settlement for the Jewish community in Thessaloniki as restitution 
for the cemetery destroyed by the Nazis in World War II and 
subsequently expropriated by the government.  While the Minister 
was unaware of the status of this issue, he promised to look into 
it and bring it to a close. 
 
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COMMENT 
 
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¶10. (SBU)  It is clear that the Minister has the expertise and a 
strong desire to tackle the problems that have lead to a 
deterioration in Greece's public finances.  Less clear, however, is 
whether the GoG has the capacity in the short- to medium-term to 
implement the reforms it envisages.  While budget cuts are 
important, they are meaningless unless accompanied by an overhaul 
of Greece's taxation and budget frameworks.  But such an overhaul 
will take time to build capacity currently lacking.   According to 
the OECD, reducing tax evasion is one key to putting public 
finances on a strong footing.  This, however, will be dependent 
upon the GoG's ability to implement computerized systems and hire 
personnel with the appropriate expertise.  The other key to putting 
public finances on a strong footing is a budget framework under 
which the government can put an end to chronic spending overruns. 
Currently, the only entity in the GoG charged with budget 
responsibilities is the Ministry's GAO.  In addition to lack of 
independence, it lacks the personnel and authority to properly 
"score" (or assess and assign costs) current and out-year costs of 
various pieces of legislation, as well as to monitor budget 
execution by the various line Ministries.  While the GoG is in the 
process of adopting a program-based, multi-year budget process that 
will help enforce discipline by spelling out the cost and outcome 
of each activity itemized in the budget, it is slow going, and the 
government currently has no way to ensure ministries limit spending 
according to their annual budgets.  Greek ministries often spend 
their entire discretionary and non-discretionary annual allotments 
by the second or third quarter, forcing the GAO to give them 
additional funding to meet payroll for the remaining year. 
According to the OECD, this system is a key contributor to Greece's 
chronic expenditure overruns, which in turn are driving Greece's 
budget deficit (see reftel B). 
 
 
 
¶11. (SBU) COMMENT CONTINUED.  The linchpin to both near-term budget 
cuts and a longer-term tax and budget overhaul is maintaining the 
political will to undertake these reforms in the face of weakening 
public support, as well as dissension within PASOK itself, where 
some have labeled it as a battle between the party and the 
government.  Despite a comfortable parliameQary majority (160 of 
300 seats) PASOK's political will has already shown signs of 
wavering before vested interesQ in the government bureaucracy, 
trade unions, and the left wing of the party.  In the span of 48 
hours last week, the government announced a public sector salary 
freeze and then quickly scaled this back in the face of criticism 
from public servant unions and the party base, agreeing instead to 
apply the freeze to only those public employees who earn more than 
2,000 euros per month (a mere 40,000 out of 560,000 civil 
servants).  Such irresoluteness merely will serve to strengthen the 
hand and will of other special interest groups as the GoG announces 
measures that impact them.   The government has not even begun to 
break china on the much tougher issues like pensions and taxing the 
full standard of living of the self-employed (who are reported to 
be the biggest class of tax evaders and make up only 4 percent of 
the Greek tax base).  END COMMENT. 
Speckhard