TOUR D'HORIZON WITH FINMIN ALOGOSKOUFIS: WE'RE

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.