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Cablegate: Greek Pm Confronts Deficit: Big On Committment, Shy On

VZCZCXYZ1043
RR RUEHWEB

DE RUEHTH #1705/01 3491622
ZNR UUUUU ZZH
R 151622Z DEC 09
FM AMEMBASSY ATHENS
TO RUEHC/SECSTATE WASHDC 1228
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHTH/AMEMBASSY ATHENS

UNCLAS ATHENS 001705

SENSITIVE
SIPDIS
DESK PASS TO U.S. TREASURY - JEFF BAKER
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: GREEK PM CONFRONTS DEFICIT: BIG ON COMMITTMENT, SHY ON
DETAILS

REF: A. ATHENS 1451; B. ATHENS 371; C. ATHENS 339; D. ATHENS 216
E. ATHENS 176; F. 08 ATHENS 1655; G. 08 ATHENS 1515

1. (SBU) In a nationally-televised speech on December 14, Greece's
Prime Minister of just two months, George Papandreou, walked a
tightrope between maintaining public support and appeasing
impatient European partners and international markets as he set out
to bridge a credibility gap and potentially redefine the
relationship between Greek citizen and government. Under intense
pressure to rein in Greece's soaring budget deficit, the Prime
Minister chose as his audience key stakeholders necessary to the
reform process: union leaders and business groups. Evoking Greece's
firmly entrenched place in European structures, he chose as his
venue Zappeion Hall, the building which witnessed Greece's
accession to the European Economic Community in 1979. It was a
speech anticipated and feared by many - laborers and employers,
public and private sectors, Greeks and other Europeans, socialists
and capitalists alike. It was a speech that could define a new
course for a country that finds itself embroiled in issues of
credibility and solvency. In the end, it was a speech that
attempted to convey commitment but provided little detail, and
which raised more questions than it answered.

2. (SBU) Recognizing the need for strong public support for what
are certain to be unpopular measures, the Prime Minister attempted
to set a tone of urgency and common purpose, calling for national
unity and a "new social deal" to pull Greece out of its current
economic problems and debt. Saying the country "must change or
sink," Papandreou stated Greece's biggest deficit was the deficit
of credibility. He proceeded to outline measures aimed at cutting
the deficit, projected to spike at 12.7 percent in 2009, to the
goal of under 3 percent in 2013, and re-affirmed his desire to
combat corruption, tax evasion, nepotism, and political party
clientelism. The PM announced some eighty separate measures
designed to combat corruption, streamline government business,
reform the tax inspectorate, and give incentives to businesses to
invest. These measures include:

- cutting defense spending in 2011 and 2012

- cutting bonuses across the public sector

- cutting social security and government operating expenditures by
10 percent each

- introducing salary caps for public utility managers

- applying taxes of up to 90 percent on private banker bonuses

- closing a third of tourist offices overseas

- eliminating COLA for public servants earning over EUR 2,000 per
month

- introducing a capital gains tax

- re-introducing inheritance and property taxes

- a "unified" set of tax brackets to be used for all persons
irrespective of sources of income (presently, various categories of
income are taxed separately)

- a new finance police to oversee the tax inspectorate

-subjecting all tax officers to detailed financial disclosure
statements under penalty of dismissal, if they are found to receive
bribes

3. (SBU) Public commentators said the Papandreou speech tried to
cut a middle course, politically, between those cabinet ministers
who demand immediate actions to correct the economy and respond to
"pressing" EU advice, and those of a populist bent, who remain
eager to support the "underprivileged" while taxing "upper
incomes." Papandreou, commentators suggested, appears to have the
"best intentions" in trying to tackle some of Greece's most
persistent
problems, like corruption, nepotism, and political party
clientelism, yet he offered few concrete ways in how these reforms
can be affected. In fact, within hours of the PM's speech, trade
unionists were vowing renewed "struggle" to stop the government's
"anti-people policies" and preserve and defend existing
entitlements threatened by the cuts. While the PM's call on all
Greeks to participate in the reforms is commendable, the pro-PASOK
daily "Eleftherotypia" said in a lead editorial, what will really
count is the government's willingness to actually "govern" and
realize its policies -- because "the patriotism of all Greeks, when
their pockets are concerned, is a lot less enthusiastic."

4. (SBU) Immediate market response was tepid, as Greek credit
default swaps and the spread between Greek and German 10-year bonds
rose moderately, and the Greek stock exchange was down in early
trading. The EU response was also lukewarm. Following the PM's
speech, Joaquin Almunia, European Commissioner for Economic and
Monetary Affairs, said Greece's 2010 budget and "Mr. Papandreou's
statement, are steps in the right direction." But he said Brussels
wanted to see "concrete measures that will strengthen fiscal
adjustment in 2010 and ensure a fast consolidation of public
finances" when Greece sets out its plans for the Stability Program,
the EU's review of euro-zone countries' budgets, in early January.
"We will continue to monitor the macroeconomic and fiscal situation
and the implementation of the measures," he said.

5. (SBU) COMMENT. It is clear that through this speech, Papandreou
sought to assure his EU partners and the markets of Greece's
commitment to return to fiscal health. While public and market
reactions have been muted, the common refrain has been that the
Prime Minister meant well but missed the mark on concrete and
measurable actions that would instill this sense and achieve this
goal. It is not clear what the impact of the announced measures
will be on the budget in 2010, nor is there a roadmap for how the
government will get from a budget deficit of 12.7 percent in 2009
to under 3 percent in 2013. In the end, avoiding specifics that
could immediately be seized upon by various interest groups to
block implementation may give the GoG more flexibility to achieve
its goals. But in the short-term, the question remains as to
whether there was enough meat to appease the EU and markets. END
COMMENT.
Speckhard

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