GREEK GOVERNMENT UNDECIDED ON FUTURE OF OLYMPIC

UNCLAS ATHENS 002470

SIPDIS

E.O. 12958: N/A
TAGS: EAIR ECON GR OLYAIR
SUBJECT: GREEK GOVERNMENT UNDECIDED ON FUTURE OF OLYMPIC
AIRLINES FOLLOWING EUROPEAN COMMISSION'S DECISION ON ILLEGAL
STATE AID

REF: (A) ATHENS 2114; (B) ATHENS 1372

SUMMARY
--------------

1. (U) A European Commission decision ordering Olympic
Airlines to pay back some 500 million euros in illegal state
aid, although widely expected by industry observers, appears
to have taken the Greek government by surprise. The
decision, which came in the midst of a final Greek
government effort to sell the struggling airline, has set
the Greek government moving in three directions: to appeal
the decision to the European Court, to determine the
intentions of potential investors, and to manage the
domestic political fall-out. An inter-ministerial committee
chaired by the Prime Minister will convene on September 20
to work out next-steps on the ailing air carrier. End
Summary.


2. (U) Despite early warnings, the GoG appeared unprepared
for the European Commission's decision to require Olympic
Airlines to return nearly 500 million euros in illegal state
aid obtained from 2002 to present; as well as reaffirming
that the GoG must recover an earlier 160 million euros in
illegal subsidies from the period 1998 to 2002.


3. (U) This EC decision comes after a European Court ruled
in May that GoG transfers of 160 million euros from 1998 to
2002 comprised an illegal subsidy. The new EC decision adds
an additional 500 million euro in repayment based on state-
aid for leasing aircraft, failure to pay tax and social
security liabilities, and other indirect assistance OA has
received. The EC decision also clearly states that the 2003
split of Olympic Airways and Airlines does not affect the
repayment of the subsidies, and specifies that Olympic
Airlines (the flight operations unit) is the inheritor of
the obligation.


4. (U) Following the announcement of the Commission's
decision, the government started a marathon of inter-
ministerial meetings to culminate in a meeting chaired by
the Prime Minister on September 20 to decide on further
action. Government Ministers have tried to ease the
reaction of the airline's employees on one hand, and to
determine the intentions of potential buyers on the other.
The Commission's decision, which came in the midst of a last
Greek government effort to sell the struggling airline,
calls into question the viability of privatization deal the
GoG had struck with Olympic Investors. (ref A)


5. (U) Nevertheless, the GoG has announced that it will push
ahead with attempts to sell the airline, even if this
requires beginning negotiations anew. According to Transport
Minister Liapis, the government will exhaust all options
available to keep Olympic Airlines alive, including
appealing against the Commission's decision in the ECJ.
Also, PM Karamanlis has announced that no Olympic employees
will lose their jobs as a result of the EC decision.


6. (SBU) Comment: It is clear that the GoG was caught
unprepared by the EC ruling, and had no contingency plan in
place. Although Minister of Finance Alogoskoufis had earlier
told Embassy that the EC would do nothing to "jeopardize"
Olympic's privatization, this does not appear to have been
the case. Embassy has been in contact with Olympic
Investors Group, which maintains that all is not lost on the
deal, and is sending representatives to Greece later this
week to explore options with us. End comment.

RIES