US embassy cable - 05ATHENS2625

UNCLAS SECTION 01 OF 02 ATHENS 002625 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, GR, AMB 
SUBJECT: TOUR D'HORIZON WITH FINMIN ALOGOSKOUFIS: WE'RE 
COMMITTED TO REFORM 
 
REF: A. ATHENS 2431 
 
     B. ATHENS 1494 
 
1.  (SBU) SUMMARY.  In the wake of PM Karamanlis' 
Thessaloniki speech (reftel) Finance Minister Alogoskoufis 
detailed GOG economic reform efforts in a wide-ranging 
meeting with Ambassador on October 3.  Stressing that Greece 
needed to change its international image from being "a 
country of ten million, but rather a gateway to a much 
broader region." Alogoskoufis highlighted the following 
points during the meeting: 
-- He had just submitted the 2006 draft budget, which kept 
Greece on the path to fiscal consolidation (2006 debt/GDP 
below 3%), and continued economic reforms; 
-- One-third of the reduction in the deficit was the result 
of debt securitization, a method of bringing debt collection 
revenues forward and one which EUROSTAT would hopefully 
approve, as it had done in the case of a similar plan by 
Portugal; 
-- In spite of the GOG's success in bringing down the 
deficit, growth in 2005 was on track to reach 3.6% as a 
result of a wise policy mix of tax reductions and investment 
incentives; 
-- The GOG would continue with its efforts to reform public 
enterprises through the introduction of international-level 
accounting standards, among other reforms.  The GOG hoped to 
be able to privatize such enterprises at a later date; 
-- The GOG would move forward, albeit cautiously, with 
introducing "OTE-style" labor reforms in other public 
enterprises, meaning new workers would no longer enjoy 
lifetime employment privileges. 
Alogoskoufis also spoke to the issue of the future of Olympic 
Airlines, a discussion to be reported septel. 
 
--------------------------------------------- ------ 
The Fiscal Picture: Greece Getting Its Act Together 
--------------------------------------------- ------ 
 
2.  (SBU)  Alogoskoufis noted the GOG had just submitted its 
draft 2006 budget to Parliament, as required by law, where it 
would be examined by the appropriate committees.  It would be 
submitted in final form the third week of November. 
Alogoskoufis said the budget clearly illustrated the 
improving Greek fiscal situation.  Debt/GDP was on track to 
fall from 6.6% in 2004 to 3.6% in 2005, and the GOG remained 
committed to bringing it below 3% in 2006.  Alogoskoufis was 
particularly proud to have achieved this improvement while 
maintaining relatively strong growth of 3.6% in 2005 and 
having brought unemployment down to 10.4% from 11% the year 
before.  Alogoskoufis credited the GOG's policy mix of 
reducing corporate taxes while introducing laws to improve 
the climate for private investment.  These initiatives helped 
maintain growth rates and counterbalanced the GOG's reduction 
in public investment by 1.6 billion Euro (equal to 1% of 
GDP), which resulted from the end of spending on 
infrastructure for the Olympic games. 
 
3. (SBU) Alogoskoufis noted that approximately one-third of 
the fiscal consolidation will come from the securitization of 
almost two billion Euro in Greek debt in both 2005 and 2006. 
Essentially, the GOG had identified the highest-quality (and 
most easily collected) tax arrears debt owed the government, 
asked investment agencies such as Moody's to rate it, and 
planned to securitize it and sell it to interested investors. 
 The income generated would be booked against the two budget 
years as revenues by EUROSTAT.  Alogoskoufis noted that he 
expected this plan to win EUROSTAT approval, as Portugal had 
successfully implemented an almost identical plan in the 
past; Greece's debt, Alogoskoufis noted, was higher-quality 
than Portugal's. 
 
4.  (SBU) Alogoskoufis noted his securitization plan gave 
Greece "more time" on the difficult issue of tax evasion, 
which continued to weigh on revenues.  The Minister said he 
was pushing to use electronic means to strike at the worst 
tax evaders and had just finished implementing a system of 
cross-checking corporate revenues against purchases.  An 
initial examination had found discrepancies in 2004 alone of 
approximately five billion Euro, of which approximately 50% 
was due the state (19% VAT plus up to 35% corporate income 
tax).  The fact that almost 80% of the discrepancies that 
were found involved transactions worth more than 100,000 Euro 
meant the State was in a good position to identify and punish 
the worst evaders. 
 
---------------------------- 
Reforming Public Enterprises 
---------------------------- 
 
5. (SBU)  Alogoskoufis emphasized the importance the GOG was 
giving to reforming and in some cases privatizing public 
enterprises such as the Postal Savings Bank, Public Power 
Corporation, and others.  The GOG planned to introduce 
international accounting standards, improve corporate 
governance, and improve policy coordination.  On the latter 
front, Alogoskoufis noted that coordination was now hobbled 
by the fact that, although the Ministry of Finance held the 
equity on behalf of the state, most public enterprises were 
in fact run on a day-to-day basis by other ministries closest 
to the subject matter of the enterprise in question. 
Alogoskoufis was working to create a new interministerial 
committee, on which all relevant ministries including Finance 
would sit, that would oversee these enterprises. 
 
6. (SBU)  The GoG is also committed to moving forward with 
additional labor market reforms, especially at state-owned 
enterprises where lifetime employment rights and generous 
pensions add to costs and make privatization difficult. 
Alogoskoufis recalled the government's coup earlier in the 
year at the state-owned telecommunications company OTE (Ref 
B).  At that time, Minister of Labor Panayiotopoulos had been 
able to negotiate with OTE's principal union generous 
severance payments for a reduction in force as the price of 
the union's acquiescence that new employees will not receive 
state employee status and pensions.  That package however 
enraged other unions and PASOK, which correctly saw the "OTE" 
model as threatening to all state-employee groups.  PASOK 
subsequently engineered the removal of the OTE union 
leadership that had negotiated the deal (most unions are 
affiliated with a political party and the largest unions are 
in the PASOK camp).  In the summer the government had had to 
resort to imposing OTE-like two-tiered compensation models on 
bank employees by legislative fiat.  In his Thessaloniki Fair 
speech, the Prime Minister reiterated his intention of using 
the "OTE" model throughout the state sector.  Alogoskoufis 
admitted it will not be easy however and will depend on 
politically painting PASOK and the unions as defenders of 
special privileges not available to ordinary Greeks. 
 
-------------------------------- 
Improving the Investment Climate 
-------------------------------- 
 
7.  (SBU)  Alogoskoufis said he was committed to improving 
Greece as an investment destination.  He underlined GOG 
efforts to combat Greece's much-maligned bureaucracy, noting 
that the lack of a national zoning plan had created an 
extraordinarily complex situation for potential investors, 
whose plans were frequently challenged by Greek courts.  He 
believed the best way to approach the problem was to create 
specific zoning plans at the national level for different 
land uses, such as tourism and industry.  Doing so avoided 
many of the current legal problems plaguing interested 
investors.  He also stressed that the "one-stop investment 
shop," ELKE, would be moved to the Prime Minister's office, 
where it would receive high-level attention and command 
bureaucratic clout.