SENIOR GREEK BANKER COMMENTS ON GREEK ECONOMY, NEW

UNCLAS ATHENS 001583

SENSITIVE
SIPDIS
DESK PASS TO U.S. TREASURY - LUKAS KOHLER
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: SENIOR GREEK BANKER COMMENTS ON GREEK ECONOMY, NEW
GOVERNMENT, BANK HEALTH

REF: A. ATHENS 1581; B. ATHENS 1451; C. ATHENS 371; D. ATHENS 339

E. ATHENS 216; F. ATHENS 176; G. 08 ATHENS 1655; H. 08 ATHENS 1515

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SUMMARY

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1. (SBU) In a recent conversation with DepEconCouns, Nikolaos B.
Karamouzis, the Deputy Chief Executive Officer of Eurobank EFG,
Greece's second largest private bank in terms of both deposits and
assets, discussed his views on Greece's economic and budget
situation, the new PASOK government and its reform capacity, and
the strength of Greeks banks. Karamouzis, a self-proclaimed PASOK
supporter and an American-educated economist who also has served as
a Deputy CEO at the National Bank of Greece and a staff economist
at the Bank of Greece (Greece's central bank),indicated the new
government has inherited an economy on the brink of collapse and
has very few options open to it to rein-in public finances and very
little time to act before capital markets and the EU respond
punitively. While major expenditure cuts are needed, Karamouzis is
not optimistic that the new government has the capacity and
willingness to undertake such measures. In his mind, the new
government has 100 days to prove to Greek citizens and
international markets that it has the capacity and willingness to
implement painful reforms. But he believes that PASOK already lost
a key opportunity when it failed to act quickly and decisively to
end the 16-day strike by dockworkers opposed to the privatization
of the Piraeus port (see reftel A). Karamouzis applauded
Papandreou's decision to carve the Ministry of Finance from the
Ministry of Economy, but he believes that the lines of authority
have not been clearly delineated, which he believes will lead to
conflict and confusion in the management of economic policy -
something Greece can ill afford. Finally, on the health of Greek
banks, Karamouzis asserted that with the "life-saving"
interventions by the IMF in countries like Bulgaria and Romania,
concerns about Greek bank subsidiaries in the Balkans were
receding. Concerns about bank operations in Greece, however, were
still high, since the impact of the crisis was only now beginning
to be felt in the real economy. End Summary.



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THE GREEK ECONOMY: TWIN CHALLENGES OF DEFICIT AND DEBT; GROWTH
PROSPECTS

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2. (SBU) Karamouzis indicated in a recent conversation with
DepEconCouns that dealing with Greece's twin deficits (e.g., the
budget deficit and the public debt) is the most urgent and acute
challenge facing the new government. He projects that public debt
will reach almost 300 billion euros, or 115 percent of GDP, by the
end of 2009 (according to new GoG data, the debt in 2008 was 99.2
percent of GDP; for 2009 through end-June, the level of debt had
increased to 111.5 percent of GDP). The size of the interest
component alone (12 billion euros for 2009) is challenging the
government's ability to service it without resorting to further
borrowing. [Note: A key factor in assessing whether a country's
debt burden is sustainable is whether it can service the annual
interest coming due without borrowing more and thereby adding to
the debt load. End Note.] Rising interest rates, which are almost
certainly around the corner in Karamouzis's view, will aggravate
Greece's ability to continue to service this debt without continued
borrowing.




3. (SBU) Karamouzis regards narrowing the budget deficit as crucial


if Greece is to continue to be able to service this debt and,
ultimately, get on the path towards reducing it. Karamouzis
explained that to comply with the 3 percent deficit cap under the
EU's Growth and Stability Pact (SGP),Greece will need to find
budgetary savings on the order of 18-20 billion euros over the next
three years. Karamouzis underscored that because the government's
new 2009 deficit projection (12.5 percent of GDP, or approximately
30 billion euros) was over half of the expected 2009 revenue base
of 50-60 billion euros, finding these savings could not come from
additional taxes alone. The government will need to implement
major spending cuts in addition to improving tax collection and
tackling tax evasion.




4. (SBU) Karamouzis believes that the economy will shrink this year
by approximately 1.5 percent (GoG projects the same),despite
factors that have supported demand and growth (e.g., a large budget
deficit exacerbated by government spending and 2 percent growth in
nominal wages). Notwithstanding a potentially strong recovery in
the EU next year, he forecasts that the Greek economy will shrink
again in 2010 by 0.5 to 1 percent as a result of flat real wages, a
continued deceleration in credit, and the measures that the GoG
must take to shrink the deficit.



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IS THE NEW GOVERNMENT UP TO THE TASK?

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5. (SBU) Karamouzis, who is a self-proclaimed PASOK supporter and
claims he has close ties with many in the new government (including
the Minister of Finance Giorgos Papakonstantinou and Minister of
Citizens' Protection Michalis Chrysochoidis),is hoping for the
best, but he sees a very difficult road ahead and increasingly
limited options for the government. He regards this as the most
difficult economic environment that Greece has faced in over 50
years, and it will require years of persistent, focused, and
unpopular policies. PASOK, Karamouzis believes, has a very limited
window of opportunity in which to act to convince Greek citizens
and the markets that it is committed to undertaking serious public
finance and structural reforms. In his opinion, the context in
which the GoG acts will become increasingly constrained for several
reasons: (1) a high level of frustration and low level of patience
among people as a result of the lack of action taken by the
previous government; (2) intensifying calls from the EU for
immediate reforms; (3) weakening bargaining power with labor
unions, as the Communist Party of Greece (KKE) and SYRIZA seek to
foment and take advantage of labor union discontent; and (4)
increasing social discontent as people feel more personal impact
from the crisis. If PASOK does not act decisively in the first 100
days, Karamouzis fears the government will lose popularity, the
economic environment will continue to deteriorate, and it will be
all the more difficult to sell reforms to an angry and disheartened
public.




6. (SBU) While the new PASOK government has stated that it intends
to narrow the budget deficit to a single digit in 2010 through a
combination of measures, including aggressively fighting tax
evasion, cutting spending and increasing taxes on only the wealthy,
Karamouzis is not optimistic that PASOK will have the political
room or willingness to implement these measures. He believes that
spending cuts will be fought hard by PASOK traditionalists' desire
to play to the party's established constituencies like labor and,
in particular, the civil service. On tax evasion, he is not
certain the GoG has the resolve and the technical capacity to solve
the prolific problems that contribute to it. Finally, Karamouzis
believes that there will be strong pressure to resort to additional
taxes if it becomes increasingly clear that the other measures are
simply too difficult to effect.



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HANDLING OF THE PORT STRIKE: PORTENT OF THINGS TO COME?


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7. (SBU) Karamouzis stated that he was disappointed by the GoG's
handling of the recent strike by Port of Piraeus dockworkers
protesting the privatization of the port's management to
Beijing-based China Ocean Shipping Company (COSCO) Pacific (see
reftel A). While he understands that Prime Minister Papandreou
promised during the election campaign to reexamine various
privatization deals negotiated by the previous government in order
to gain the support of labor unions, he believes this rhetoric
backfired on PASOK. In his opinion, it created an air of
expectation and galvanized dockworkers to go back on strike
(following months of relative quiet) with the aim of forcing the
new government to abrogate the COSCO deal. Now that PASOK is in
office, campaign rhetoric aside, Karamouzis would have liked to see
PM Papandreou prioritize the needs of the Greek economy and all
Greek citizens above the selfish demands of one small group. By
acting quickly and decisively to quash the strike (Karamouzis did
not suggest how the GoG might have done so),Papandreou could have
shown investors that contract rights and foreign direct investment
(FDI) were respected and supported. Karamouzis expressed concern
that companies looking to invest their dwindling resources will
interpret the GoG's actions as not business-friendly and decide
against investing in Greece at a time when Greece desperately needs
FDI to help it recover from the global financial crisis.




8. (SBU) Karamouzis also fears the "tentative" way the GoG dealt
with a strike that had paralyzed Greece's busiest seaport and cost
the Greek economy millions of euros a day plays right into the
hands of other labor groups looking to exploit the GoG's pro-labor
leanings. Karamouzis gave as an example a series of upcoming
strikes by bank labor unions, which are seeking to force the
government to enter into a collective bargaining agreement for
automatic wage hikes. [Note: Collective wage agreements, which
unite different unions seeking various benefits like wage increases
against the GoG, are common in Greece. They often weaken the GoG's
bargaining position by forcing it to deal with an entire sector's
employees as a block versus dealing with each union on an
individual basis. The IMF and others point to these collective
agreements as a key constraint to improving competitiveness, as
they lead to wage hikes above the rates of inflation and
productivity. End Note.] Unless PASOK gets tough on labor unions
and their demands immediately, Karamouzis expressed fear that the
KKE and SYRIZA will use labor discontent to challenge and goad
PASOK to live up to its socialist ideals, making it more and more
difficult for PASOK to achieve its stated reforms. This could
reach a head by December, as Greece approaches the one-year
anniversary of the shooting death by police of a teenager and the
riots that followed.



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THE NEW ECONOMIC MINISTRIES

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9. (SBU) Karamouzis applauded PM Papandreou's move to separate the
Ministry of Finance from the Ministry of National Economy and to
create a new Ministry of Economy, Competitiveness and Merchant
Marine. He is concerned, however, that the lines of authority have
not been clearly delineated. According to Karamouzis's discussions
with senior members of the government, Minister of Finance Giorgos
Papakonstantinou will be responsible for revenues and spending,
taxation policy, dealings with international institutions like the
IMF and the European Commission, the finances of Greek state
organizations, debt management, the stock exchange and banks, and
overall economic policy. His GoG interlocutors have told him that
the new Ministry of Economy is supposed to function like the U.S.
Department of Commerce, with its new head, Louka Katseli,
responsible for trade and commerce, competition policy, antitrust
issues, and shipping issues. This division will only work,
according to Karamouzis, if the two new ministers have good
cooperation. Karamouzis shared frankly with DepEconCouns that the
two Ministers in question are known to collide on a personality and


policy basis. According to Karamouzis, it is well known within
PASOK that Katseli expected to become the "economy czar," with a
range of power and responsibilities similar to that of her husband,
Gerasimos Arsenis, who was the Minister of Economy and Finance and
head of Greece's central bank in the early 1980s under PM Andreas
Papandreou. Karamouzis thinks that PM Papandreou made the right
choice in making Papakonstantinou responsible for the most
important part of economic policy. He is viewed, according to
Karamouzis, as more free-market minded, friendlier to investors,
and more favorably by capital markets and ratings agencies.
Katseli, on the other hand, Karamouzis indicated, is viewed as
supporting more pro-labor and populist economic policies.
Karamouzis stated that Katseli is supposed to have an undefined
role in advising PM Papandreou on economic policy - a situation
which he believes will create conflict and confusion in the
management of economic policy - both of which Greece can ill afford
at this crucial time.



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BANKS: PASOK POLICIES TOWARDS; GENERAL HEALTH

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10. (SBU) Despite PASOK's rhetoric while in the opposition and
during the election to nationalize banks and their profits,
Karamouzis does not believe PASOK will attempt to intervene in the
market operation of Greece's banks. He thinks that, at most, PASOK
will undertake the following vis-C -vis the banks: (1) impose an
extra tax on banks' 2009 profits; (2) pass a consumer protection
law that most banks favor as long as it does not encourage people
to default on their debts; (3) support bank unions in their demands
for wage hikes; and (4) merge two state-owned banks (Agricultural
Bank of Greece, or ATEBank, and Postal Savings Bank) to create a
state-development bank along the lines of Germany's KfW
(Reconstruction Credit Institute, formed after World War II as part
of the Marshall Plan). Karamouzis believes without a doubt that
the GoG also will appoint a new head of Greece's largest private
bank, the National Bank of Greece (NBG). Karamouzis said that this
is a tradition given that state pension funds control 17 percent of
the NBG's stock, and it is not one PASOK is likely to forego.
[Note: DepEconCouns has heard from two trusted sources at NBG that
Karamouzis's name is being bandied about as the potential new head
of NBG. End Note.]




11. (SBU) On the health of Greek banks in the aftermath of the
global financial crisis, Karamouzis stated that the sector as a
whole is doing well. Most large Greek banks are returning to
profit, but these are the result more of trading activities in the
capital markets and less traditional banking (mortgages, consumer
lending, etc.). Credit expansion continues to decelerate for
Greece as a whole, having fallen to 6 percent in August from 6.6
percent in July. Concerns over Greek bank subsidiaries in the
Balkans have abated, according to Karamouzis, largely due to the
various IMF interventions in the region, particularly in Romania
and Bulgaria. Karamouzis indicated that Greek banks today are more
concerned with the situation in Greece itself than that in the
Balkans. This is due to the fact that the real economy in Greece
has only begun to be hit by the effects of the global crisis.
Eurobank and other Greek banks are watching non-performing loans
(NPLs) carefully in Greece, fearing that as the economy continues
to shrink and unemployment rises, more and more businesses and
people will not be able to service their loans. Karamouzis
outlined that Eurobank's NPL ratio for loans 90 days or more past
due for the Balkans was deteriorating at a slower pace (6.5 percent
at the end of the 3Q 2009),while its NPL ratio for Greece was
beginning to deteriorate at a faster pace (5.5 percent at the end
of 3Q2009). [Note: Eurobank EFG is the second largest bank in
Greece in terms of both assets and deposits. It has a banking
presence in Bulgaria, Serbia, Romania, Turkey, Poland, Ukraine,
United Kingdom, Luxembourg, and Cyprus. Its loan-to-deposits ratio
for the group as a whole at end 2Q2009 was 117 percent, while it
was 143 percent in New Europe (Balkans, Turkey, Poland, Ukraine).
The capital position of the group at the end of 2Q2009 is as
follows: Total Tier 1: 10.2 percent; Total Capital Adequacy Ratio:
12.1 percent. End Note.]


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COMMENT

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12. (SBU) As a self-avowed supporter of PASOK, Karamouzis's views
are a sign that the new government has its work cut out for it if
it is to convince the Greek electorate and markets that it is able
and willing to take on reforms. PASOK rhetoric has set the bar
high regarding public expectations, potentially complicating the
government's efforts to balance competing priorities.
Speckhard