Sunday, April 6, 2014

Beware of Greeks Bearing Primary Budget Surpluses!

"A primary budget surplus is a surplus of revenue over expenditure which ignores interest payments due on outstanding debt.  Its relevance is that the government can fund the country’s ongoing expenditure without needing to borrow more money; the need for borrowing arises only from the need to pay interest to holders of existing debt.  But the Greek government has far less incentive to pay, and far more negotiating leverage with, its creditors once it no longer needs to borrow from them to keep the country running. This makes it more likely, rather than less, that Greece will default sometime next year".  

This was written in the Geographis Blog last December. Today, nothing seems further from reality than a Greek default: the country is receiving accolades from all sides; financial investors are lining up to get a piece of the action before the recovery goes through the roof; Greece's borrowing costs are declining to levels last seen only before the crisis; etc. 

Still, the argument is in and by itself correct: the government can now pay its domestic bills without requiring money from abroad. Furthermore, with a current account surplus, the entire economy can now survive without funding from abroad. As long as Greece had a primary budget and a current account deficit, its negotiating strength was the nuke. Using it would have brought down Greece itself as well. With surpluses in domestic and external accounts, the nuke has turned into a strong weapon.

Perhaps Greece should use this new weapon to introduce a new kind of conditionality. So far, conditionality has meant that Greece gets money in exchange for reform commitments. However, the tone has changed already. Where previously Greece was told to "do this, or else...", the German Finance Minister Schäuble, the old fox, now says in a remarkable Ekathimerini interview that the terms of any new program for Greece "would certainly be much lighter. Help from the European rescue mechanism can only come with conditionality. But this obligation for a commitment to reforms served one purpose only: to bring growth to Greece".

This is exactly the argument on which Greece could rest its own demand for a new kind of conditionality: "We accept your conditionality because, as you say, it is meant for growth, i. e. for our own good, but that will only work if you also arrange for new foreign direct investment in Greece". Put differently: just barely keeping Greece alive while saving the Euro is no longer good enough. There now have to be measures which help the patient to speedily recover. Or else...

By foreign direct investment, I do not mean financial investors who acquire Greek financial assets. Instead, I mean foreign companies which transfer money and know-how to Greece to create new economic activity/value in Greece, preferably stimulating new exports. That, in my opinion, is the only way to achieve an accelerated increase in employment.

Would that new conditionality mean asking too much of foreigners? Not at all! Foreigners wouldn't be asked to give anything; instead, they would be offered the opportunity to make good investments! Foreigners will immediately reply that there simply are no good investments in the Greek real economy as long as the economic framework remains as it is. Fine. So both, potential foreign investors and the Greek government, will have to agree on something which is satisfactory for both sides. A new Foreign Investment Law would be a suitable instrument to accomplish this.

In certain ways, the window of opportunity for a constructive approach to a new kind of conditionality as above may not be open forever. Given everything that SYRIZA has said so far, it would be almost reckless of them not to use the new weapon of balanced internal and external accounts should they come into power. But given everything SYRIZA has said so far, it would appear highly unlikely that they would use the new weapon in a constructive way.

Incidentally, I came across the Geographics Blog through John Mauldin's newsletter which, as always, is very interesting to read. This time, his analysis of "The Lions in Europe" seems particularly fitting the current situation.


  1. Using a snapshot of the economy as negotiating advantage, is far from reality. The truth about the 'Surplus' (which is mainly due to withholding payments towards third parties in the inner debt becomes surplus) can be found in the upcoming elections and the thousands of issues undermining the current government, in other words the Surplus is a communication prop, rather than an economic achievement....According to me the so called 'Surplus', even if it is actually 0,5 instead of 2,5 bln, has been based on the over-taxation (impose taxes in every irrational approach, pay 2-3 times for each asset/income etc) and the inhuman budget cuts which ended up even in loss life...Kill a few thousand pensioners and you have a surplus ...thanks a lot, can you sutain this ?

  2. The problem with the analysis in the Geographis blog is that it assumes that the really powerful discipline method is cutting off loans to the Greek government. This is wrong.The EC has a weapon so powerful it does not dare call its name:cutting off liquidity to Greek banks. Such a move will simply bring the country to its knees, but it cannot ever be mentioned, as it will cause the mother of all bank runs. This weapon can be used in a variety of ways, most indirect. If the powers that be decide that the Greeks are in need of a serious readjustment they will simply cut off liquidity (including note deliveries) and the local bankers will force the following dilemma: do as the EC says or the banks will not open tomorrow. The Greek governnment will cave immediately and nobody will notice anything. This weapon is still as potemt as ever and it will remain potent as long as the Greek economy is in need of liquidity injections ie for the foreseeable future. So don;'t expect any surprises there.