Greece's 2009 Budget Seen as Unrealistic and Out of Context

UNCLAS ATHENS 001655


E.O. 12958: N/A
TAGS: ECON GR
SUBJECT: Greece's 2009 Budget Seen as Unrealistic and Out of Context
with the Global Economic Crisis.

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Summary
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1. (U) The GoG's draft 2009 budget submitted to Parliament November
21 has been criticized by the press, citizens, opposition parties,
and informed observers alike as being unrealistic and out of context
with the current economic crisis and resulting slowdown. Although
all economic indicators originally included in a pre-draft of the
budget presented about two months ago have been revised downwards to
reflect the impact of the global economic crisis, the revised
projections are far more optimistic than those by informed parties
such as the IMF and various independent analysts. The budget
projects 2.7 percent growth for the country's GDP in 2009 (versus
the IMF's projection of 2 percent) and 7.1 billion euros in
additional revenues. The budget projects a drop of the general
government deficit to 2.0 percent of GDP in 2009 (versus the IMF's
projection of 2.3 percent) from 2.5 percent in 2008 and reduced
public debt at 91.4 percent of GDP in 2009 from 93.4 percent in

2008. At best, unrealistic targets will mean that the GoG will need
to issue revisions during the year. At worst, these targets could
undermine the credibility of the GoG's commitment to economics
reforms and result in international credit ratings agencies
downgrading their outlook for Greece. END SUMMARY.

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The Draft 2009 Budget
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2. (U) On November 21, Economy and Finance Minister George
Alogoskoufis submitted to Parliament the draft 2009 budget. It aims
at ensuring satisfactory economic growth, while further reducing the
deficit, combating poverty (by funding a National Fund for Social
Cohesion, continuing tax reforms, and cutting unemployment and
ensuring the viability of the social insurance system. According to
its introductory report, the 2009 budget projects that the
international economic crisis will continue in 2009 with significant
consequences on the Greek economy. All economic indicators
originally included in a pr-draft of the budget presented about two
months ago have been revised downwards; however, most press and some
economic analysts have indicated that the GoG projections are too
optimistic considering the uncertain times the global economy is
facing.


3. (U) Addressing the Greek Parliament soon after the budget's
submission, Minister Alogoskoufis admitted that the budget
projections may prove too optimistic given the global economic
crisis. He also said that the fiscal adjustment program at the
center of the GoG's reform efforts, and which constitute one of the
main targets of the GoG's economic policy, can only be of secondary
importance in relation to the need to help mitigate the impact of
the crisis on the real economy. The budget envisages that the Greek
economy will grow by 2.7 percent in 2009, down from 3.2 and 4.0
percent in 2008 and 2007, respectively. The inflation rate will slow
to 3.0 percent in 2009, from 4.3 percent in 2008 and 2.9 percent in
2007, while private consumption will ease to 2.2 percent from 2.3
percent in 2008 and 3.0 percent in 2007. The unemployment rate is
forecast to remain at 7.5 percent, unchanged from 2008 but down from
8.0 percent in 2007. [Note: Greek unemployment figures are often
criticized for considerably underestimating Greek unemployment as
they do not include jobless people who are going through official
state training programs (regardless of whether they find employment)
and those who have been unemployed over a year and no longer benefit
from unemployed assistance programs. End Note.]


4. (U) Regular budget revenues are forecast at 64.2 billion euros
in 2009, up 12 percent from 2008 while spending will rise 9.1
percent to almost 66 billion euros in 2009 from 60.45 billion in

2008. Expenditures for wages will increase by 6.8 percent in 2009
(versus 8 percent in 2008),and outlays for pensions also will rise
at the slower pace of 12.7 percent in 2009 (versus 13.5 percent in
2008). Expenditures for new armaments are projected to drop by 15.2
percent in 2009. The budget projects a drop of the general
government deficit to 2.0 percent of GDP in 2009 from 2.5 percent in

2008. This will be difficult to achieve during a slowdown. It also
projects a drop in public debt to 91.4 percent of GDP in 2009 from
93.4 percent in 2008. To this effect, the budget provides for 7.1
billion additional tax revenues, 13.2 percent up compared to 2008.

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Programs to Mitigate Impact of Crisis
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5. (U) Despite the government's rhetoric for months that it would
take steps to assist low income earners and the unemployed, the
draft budget included surprisingly little new social spending. The
draft earmarked 350 million euros for the National Fund for Social
Cohesion (inaugurated in 2008 with 100 million euros). These
figures are below the government's promises of 1.5 billion euros to
the Fund for the 2008-2009 period. The Economy Minister attributed
the difference to "the dramatic changes since 2007," which did not
allow for more spending for the poor. [Note: Late last week, the
government announced further details on the 350 million earmarked
for the Fund in the draft budget. The GoG said these funds would be
used to give special housing loan and heating benefits to
pensioners, low-wage earners, and the unemployed. In addition, the
GoG announced that it was working on a 2 billion euros package of
measures affecting 1 million low income or unemployed citizens.
While light on details, the measures are to be funded through a
combination of GoG and EU funds and include: (1) 70 million euros
for an increase in the holiday benefit for 300,000 people; (2) 310
million euros for an employment program for 60,000 current
unemployed beneficiaries; (3) 500 million for a training program for
small business to "preserve employment" and improve competitiveness;
and (4) 380 million for a program to support getting people back to
work and creating job opportunities for those that have to leave
school early. The government's announcement of these additional
measures is seen as a direct response to criticism that its draft
budget did not provide enough support for the most vulnerable. The
government is now being criticized for its lack of details on how
these new programs will be implemented and for how they impact its
draft budget targets. It is not clear how much the GoG will fund
(versus the EU),and whether the GoG will amend its draft budget to
include these spending programs in 2009. End Note.]

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Government Debt
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6. (U) The general government debt is expected to reach 237,930
billion euros in 2009 or 91.4 percent of GDP (228,868 billion or
93.1 percent of GDP in 2008). The draft budget indicates the
government will borrow 41 billion euros in 2009 in order to finance
its budget needs. This estimate is very optimistic considering
that the government borrowed 43.4 billion euros in 2008, exceeding
the target of last year's budget by 6.4 billion euros, and that the
cost of borrowing will be higher next year. Payment of interest on
the current debt bill is expected to exceed 12 billion euros in

2009. Minister Alogoskoufis said that, due to uncertainty on the
cost of borrowing, the borrowing plan for 2009 will be flexible.
The government borrowing figures reportedly include the 5 billion
euros portion of the State bank aid plan that would be used to
inject capital directly into the banking system in exchange for
preferred shares for the government.

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Comment
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7. (U) The press and opposition parties unanimously have criticized
the 2009 draft budget as being unrealistic under today's
extraordinary circumstances. Some analysts wonder how the Greek
government will manage to collect 7.1 billion additional revenues in
an environment of low demand and economic slowdown. Minister
Alogoskoufis claims that they will come from the "fight against tax
evasion," but we believe this argument to be unrealistic judging
from the poor results of similar efforts in previous years. (Poor
tax collection obliged the Economy Ministry to revise the target for
revenue collection down from 54.6 billion euros to 53.8 billion in
2008 as the target in the 2007 budget proved also too optimistic.)
While the recent measures to help the most vulnerable should be
helpful in mitigating the impact of the crisis, too few details have
been made available, and it is not known how these programs will
impact the GoG's deficit targets, which are already a stretch in the
current environment. Further, instead of boosting investments and
domestic demand the budget leaves the public investment program for
2009 at the same level as 2008 (8.8 billion euros). Finally, many
view the growth projection of 2.7 percent in 2009 as too optimistic
and higher than the projections of international economic entities
(Eurostat, UBS, IMF, OECD etc.) of no more than 2 percent (at best)
growth for Greece in 2009. Post expects a revision of key targets
early in 2009. The current GoG projections could undermine Greece's
credibility with investors and ratings agencies and result in a
country downgrade. END COMMENT.

SPECKHARD