VZCZCXRO6504
OO RUEHIK
DE RUEHTH #2192/01 3621534
ZNR UUUUU ZZH
O R 281533Z DEC 09
FM AMEMBASSY ATHENS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1262
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHIK/AMCONSUL THESSALONIKI 0031
RUEHTH/AMEMBASSY ATHENS

UNCLAS SECTION 01 OF 04 ATHENS 002192 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ECIN EFIN PREL GR
SUBJECT: GREEK PARLIAMENT ADOPTS 2010 BUDGET: TARGETS AMIBTIOUS, BUT 
SPECIFICS LACKING 
 
REF: ATHENS 1705 
 
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Summary 
 
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¶1.  (SBU) The Greek budget for 2010, which was passed by Greek 
Parliament on December 23, is an attempt to bring order to Greece's 
public finances and restore its badly-dented credibility with 
foreign investors, international credit ratings agencies, and the 
European Union.  The budget aims to reduce the country's deficit 
from 12.7 percent of GDP in 2009 to 9.1 percent in 2010 through a 
series of revenue-enhancing and expenditure-reducing measures.  The 
government has already promised to aim for a bolder deficit cut to 
8.7 percent of GDP, which may be included in the January update of 
Greece's 3-year Stability and Growth Plan (SGP). 
 
 
 
¶2.  (SBU) Summary Continued. While many analysts believe the 2010 
budget targets are probably attainable, the EU and ratings agencies 
see the passage of the budget and measures therein as an inadequate 
response to Greece's chronic and structural fiscal weaknesses.  The 
reasons for this include the one-off nature of the measures, a less 
than ideal policy mix that relies too heavily on measures where the 
payoff is uncertain and negligible in the near-term, and the lack 
of vetting with and acceptance by the public, particularly major 
labor unions, which have already said they are planning a series of 
strikes to protest against planned wage freezes and/or cuts and 
pension reforms.  These legitimate concerns, however, may mask the 
EU's and markets' chief complaint: the GoG's refusal to follow in 
the footsteps of Ireland by cutting public sector wages - a step 
many see as the holy grail for public sector reform and which could 
buy the GoG the time and credibility it needs in the short term in 
order to implement longer-term reforms.  While most analysts and 
the EU are waiting for the GoG to introduce more concrete and 
quantifiable measures as part of the updated SGP, it remains to be 
seen whether anything short of wage cuts will buy their patience. 
END SUMMARY. 
 
 
 
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The 2010 Budget 
 
------------------ 
 
 
 
¶3.  (SBU) On December 23, following five days of sharp exchanges 
between the government and opposition parties, Greek Parliament 
adopted a crisis budget for 2010 in a bid to bring order to its 
chaotic public finances and restore its badly dented credibility 
with foreign investors and the European Union.  The budget passed 
by a healthy majority as the 160 Socialist deputies in power since 
October 2009 voted for the budget, while the entire opposition, 
from extreme left to extreme right, voted against.  The budget aims 
at reducing the country's deficit from 12.7 percent of GDP in 2009 
to 9.1 percent in 2010.  The government has already promised to aim 
for bolder measures in order to reduce the deficit to 8.7 percent 
of GDP in 2010.  This revised target may be included in an updated 
3-year stability and growth plan, which will be unveiled next 
month.  The PASOK government claimed during the debate in 
Parliament that the 2010 budget was the nation's "toughest" since 
the restoration of democracy in 1974 after seven years of military 
rule. 
 
 
 
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Revenues 
 
--------- 
 
 
 
¶4.  (U) The government plans to increase net ordinary budget 
revenues by about 4.5 billion euros or 9 percent over 2009, 
following a 4.7 percent contraction over 2008.  According to the 
GoG, additional revenues will come from the following measures: 
 
-- 1.2 billion euros from cracking down on tax evasion and settling 
taxpayers' overdue debts; 
 
 
 
-- 1.5 billion euros from an increase in tobacco, alcohol and real 
estate taxes; 
 
-- 1 billion euros from a one-off corporate tax; 
 
-- 865 million euros from the reintroduction of a progressive tax 
on large property holdings, inheritances and bequests (in a 
separate tax bill, which the GoG plans to table in March); 
 
-- An unknown amount from the abolition of tax exemptions and a 
current, flat-rate tax regime for certain professional groups (in 
forthcoming tax bill); and 
 
-- An unknown amount from the introduction of capital gains tax and 
effective taxation of offshore companies (in forthcoming tax bill). 
 
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Spending 
 
--------- 
 
 
 
¶5.  (U) The budget provides for a decrease in ordinary spending of 
1.4 billion euros or 2.3 percent over last year, following a growth 
of 15.9 percent in spending last year.  According to the GoG, 
savings from expenditure cuts will come from the following 
measures: 
 
 
 
-- 2.3 billion euros (or 3.8 percent savings) from a cut to primary 
spending (before debt payments); 
 
 
 
-- 1.4 billion euros of savings by not repeating one-off 2009 
payments to settle state hospital debts; 
 
 
 
-- 457 million euros (or a 6.6 percent cut) of savings from defense 
spending cuts; 
 
 
 
-- A 26 percent fall in ministries' operating costs, such as travel 
expenses and power bills; and 
 
 
 
-- An unknown amount from a freeze on public sector wages above 
2,000 euros a month (civil servants making less than that amount, 
however, would receive pay rises above inflation). 
 
 
 
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Macro Forecasts 
 
---------------- 
 
 
 
¶6.  (U) According to the GoG's 2010 budget, GDP is expected to 
shrink by 0.3 percent  in 2010, a slight improvement over the 1.2 
percent drop the GoG expects in 2009.Inflation is forecast at 1.4 
percent against 1.2 in 2009, while unemployment will continue to 
rise to 9.7 percent in 2010 against 9.0 forecast in 2009.  The 
budget projects public debt will rise to 120.8 percent of GDP, 
compared to 113.4 percent for 2009.  The government plans to borrow 
up to 53 billion euros (about 22 percent of GDP) in 2010 and 
expects to pay out 12.95 billion euros (just over 5 percent of GDP) 
in interest payments next year to service the debt. 
 
---------------------------- 
 
The Budget's Key Numbers 
 
---------------------------- 
 
 
 
¶7. (U) The following table represents the top-line targets passed 
as part of the budget: 
 
 
 
(in pct, euros bln) 
 
                            2010          2009 
 
--------------------------------------------- ------ 
 
DEFICIT TO GDP (%)          9.1*         12.7 
 
DEFICIT (bln)              22.176        30.557 
 
GDP GROWTH (%)             -0.3          -1.2 
 
GDP (bln)                 244.233       240.150 
 
PUBLIC INVESTMENT (% y/y)  +8.4          -1.3 
 
NET ORDINARY REVENUES (%)  +9.0          -4.7 
 
NET ORDINARY REVENUES (bn) 53.700        49.260 
 
ORDINARY SPENDING (%)      -2.3          15.9 
 
ORDINARY SPENDING (bln)    69.796        71.438 
 
PUBLIC DEBT (% to GDP)    120.8         113.4 
 
PUBLIC DEBT (bln)         294.950       272.300 
 
--------------------------------------------- ------- 
 
*Following the submission of the budget to Parliament in November, 
the GoG announced it would aim to reduce the budget deficit further 
to 8.7 percent of GDP next year. 
 
 
 
-------------------------- 
 
Further Measures Coming 
 
-------------------------- 
 
 
 
¶8.  (SBU) The government has already announced a series of measures 
that were not included in the 2010 budget, but which the GoG has 
indicated will be included in an updated three-year Stability and 
Growth Plan to be submitted to the European Union in mid- to 
late-January.  These measures, announced by the Prime Minister on 
December 14 (see reftel) include: a 10 percent cut in supplemental 
public sector wages (which often account for a substantial part of 
civil servants' salaries); a hiring freeze for permanent public 
sector jobs in 2010, excluding the health and education sectors, 
and the hiring on one new civil servant for every five retiring 
from 2011 onwards; a one-third reduction of all short-term 
employment contracts in the public sector in 2010; a 10 percent 
reduction in social security expenditures in 2010 (likely to be 
tabled to Parliament in a bill in May); a 50 percent cut in board 
members' pay at public enterprises in 2010; managers' pay in 
state-run firms will be capped and cut by at least 10 percent; no 
bonuses will be paid to managers of state-controlled banks, while 
bonuses for private bank managers will be taxed at up to 90 
percent.  The government has not quantified the savings that would 
be achieved through the implementation of these measures. 
 
 
 
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Comment 
 
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¶9.  (SBU) Many local and international analysts believe the 2010 
budget targets are probably attainable. However, the EU and markets 
see the passage of the budget, and measures contained therein, as 
an inadequate response to Greece's chronic and structural fiscal 
weaknesses.  They view the measures as being largely of a one-off 
nature, providing little guarantee of fiscal restraint in 
subsequent years.  The policy mix is less than ideal, with an 
overreliance on revenue-raising measures like a clampdown on tax 
evasion, which has been the aim of many governments in the past 
with no results.  Also, cutbacks in spending are not as courageous 
as anticipated, and measures such as the public sector hiring 
freeze are expected to yield negligible results in the near-term. 
Finally, much depends on the degree of public support for the 
government's austerity measures.  Already, major labor unions have 
announced plans for a series of one-day (or longer) strikes to 
protest against planned wage cuts and pension reforms. 
 
 
 
¶10. (SBU) The key challenge facing macroeconomic policy at this 
time is managing to reverse unfavorable market sentiment toward 
Greece, according to the Bank of Greece's (the central bank) 
Interim Financial Stability report published the same day 
Parliament voted for the budget.  Ambitious budget projections and 
additional deficit-reducing measures announced by the Prime 
Minister to date have not reversed this sentiment.  The foremost 
reason for this may stem from the GoG's refusal to follow in the 
footsteps of Ireland by cutting public sector wages - a step many 
see as the holy grail for public sector reform and which could buy 
the GoG the time and credibility it needs to implement longer-term 
reforms.  While most analysts and the EU are waiting for the GoG to 
introduce more concrete and quantifiable measures as part of the 
updated SGP in January, it remains to be seen whether anything 
short of wage cuts will buy their patience.  END COMMENT. 
Speckhard