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### Viewing cable 09ATHENS1653, AMBASSADOR'S CALL ON MINISTER OF FINANCE PAPAKONSTANTINOU

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09ATHENS1653 | 2009-11-25 10:23 | 2011-06-25 08:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Athens
Appears in these articles: http://www.tanea.gr

`

    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

    ---------------

    SUMMARY

    ---------------

    ¶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.

    --------------------------------------------- ----------------------
    -------

    BROKEN TAX AND BUDGET ORGANS NEED REVAMPING

    --------------------------------------------- ----------------------
    -------

    ¶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.

    --------------------------------------------- ----------------------
    --------------

    BUT BUDGET AND TAXATION REFORM ARE NOT ENOUGH . . .

    --------------------------------------------- ----------------------
    --------------

    ¶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).

    --------------------------

    BILATERAL ISSUES

    --------------------------

    ¶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.

    ------------------

    COMMENT

    ------------------

    ¶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

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