Greece's Primary Surplus

One finds innumerable postings when looking for articles on Greece's primary surplus. The debate about whether it should be 3,5% or 1,5% by 2018 seems endless. Some say that 3,5% is achievable and that's why the target should be set there. Others say that, at best, 1,5% is achievable. There is hardly any explanation for the uninitiated as to why there should be a primary surplus in the first place. The assumption seems to be that a primary surplus is good (because a primary deficit would suggest that there is no 'living beyond one's means'), and the greater the surplus, the better.

The primary surplus represents the amount of money available for debt service (i. e. interest expense). If the primary surplus is 1,5% of GDP and the interest expense is 3,5% of GDP, Greece needs fresh funding from its creditors to the tune of 2% of GDP in order to pay interest to those very same creditors. If the primary surplus were, instead, 3,5%, Greece could pay all of the interest without any need for fresh funding.

The honest message from the creditors would appear to be: "We no longer want to lend you money so that you can pay us interest. Instead, you should pay us interest out of your own resources. If your interest expense is 3,5%, you must achieve a primary surplus of 3,5%. Full stop!"

And then the question would be whether this makes sense.

It is often forgotten that debt can be a wonderful thing. If the proceeds of debt are spent on investments which generate a return greater than the cost of the debt, the more debt, the better. Two strategies would appear logical in consequence: (a) examine existing spending for possible reallocations from unwise purposes (waste) to wise purposes (revenue generation); and (b) tie new spending (i. e. new debt) to revenue generating purposes.

It is never debt per se or spending per se which is dangerous. The risk does not lie in the sources of funds; the risk always lies in the application of funds.

I would expect that there is no better short-term stimulus for the economy than reducing the state arrears which, allegedly, amount to 7 BEUR by now. Why creditors would prefer receiving interest which is funded by new loans from these very same creditors instead of having such money applied to a short-term stimulus like the reduction of arrears which might make higher interest payments in the future possible escapes my imagination.

That is exactly the point which I would like to see discussed in more detail but, regrettably, I don't see that.

Considerations On Debt Relief

A nominal reduction of debt (via forgiveness) has the advantages of reducing the indebtedness ratio (debt as % of GDP) and reducing the interest expense in the budget (if the debt is interest-bearing). Put differently, such a debt relief is debtor-friendly.

Debt relief in the form of extending maturities does not reduce the indebtedness ratio and it only has the same benefits for the budget as above if interest on that debt is reduced to zero. This form of debt relief is creditor-friendly because creditors do not have to make write-off's.

From the standpoint of the budget, it is irrelevant whether debt relief comes via debt forgiveness or via reducing interest rates to zero. In either case, the budget is relieved. One could argue as follows: "If the benefit is the same either way, we'll chose the creditor-friendly way because that way we can build up goodwill with the creditors".

Since Greece already has zero interest expense on most of its debt with the EU, one could question the point of insisting on debt relief from the EU. There wouldn't be an immediate benefit to the budget from any debt forgiveness. Which brings me to the most important point.

Debt relief in the form of debt forgiveness has the ultimate objective that the borrower can return to capital markets and borrow again it its own name without any support from third parties. Put differently, if all of Greece's debt were forgiven, the major benefit would not be so much the fact that there would no longer be interest expense. The major benefit of such a decision would be that Greece could start (again) to borrow in international markets.

Greece borrowing again freely in international markets? Has that happened before? Has that led to positive outcomes?

Reflecting On 6 Weeks In Greece

This past stay was shorter than the normal 2-3 months but it seems like we are moving towards more frequent visits with shorter stays. The apartment has been returned to order, all the bags are packed, we are ready to go, except --- there are a couple of hours left before the flight. A good time to reflect.

Believe it or not --- I think Greece has turned the corner; at least for the next 2-3 years or so. By that I mean that the overall situation will certainly not get worse. Instead, it will get better and the improvement might even accelerate a bit. Here are some of my reasonings:

1) The completion of the review will trigger some form of renewed confidence. Mind you, there won't be a take-off or anything of the sort. But there will be some renewed confidence and confidence can breed confidence.
2) With the completed review, fresh money will come into the country. Mind you, there won't be a tsunami of fresh money but if the state can repay a billion here or there of its arrears, liquidity will trickle down into the economy.
3) The tourist season is expected to bring new records this year in terms of arrivals. To what extent that can translate into a record in terms of cash remains to be seen but it will certainly trigger economic activity.
4) The refugee crisis will undoubtedly have positive economic effects. After all, money is being spent which would otherwise not have been spent and the newly spent money is not offset by cuts elsewhere.

I will leave it at that even though I could easily add a few more points. One of the major points I see when I look out the window at the Thessaloniki harbor. There were times not too long ago when I was happy to count 2-3 cargo ships, and typically they were waiting to be unloaded. Today, I have counted 10 ships, all of them unloaded. I presume this mans that they will be loaded with products from Southeast Europe, including Greece.

The government has shown stability of grand proportions of late. Mind you: here we've seen that brutal austerity bills were railroaded through parliament and the 153 coalition deputies, breaking many oaths to the contrary of the past, signed off on them without a glitch. Well, not quite. One deputy dared to offer criticism --- and she was gone in no time and replaced by a yes-man. Now if that is not a testimony to stability, then I don't know what is. Of course, it also is a testimony to somewhat authoritarian government which, if a center/center-right government did that, it would be crucified by the international media.

Still, investors are looking for stability and stability is what they are presently getting in Greece, be it democratic or authoritarian.

In conclusion, I repeat that better times will be here again and we may even be surprised by the speed at which things get better. Unfortunately, I don't see this as a long-term trend.

Longer-term, the Greek economy can only blossom if there is foreign investment. Ever since I started this blog, I have said that there are only 3 solutions for the Greek economy: foreign investment, foreign investment and, again, foreign investment. I simply don't see anything this government has said or done which could prompt foreign investors to make longer-term investments in Greece. They may come to realize short-term opportunities but then they will leave again after they have done that.

My prototype foreign investment has always been Cosco. To Cosco, the Piraeus harbor seems so interesting that it justifies the struggle with the folly of Greek politics. I don't think the present Greek government has done anything to convince foreign investors that they are truly welcome. That seems to be a matter of ideology and until there is a change in that ideology, longer-term foreign investors will stay away (and perhaps even Greek investors will leave).

Setting The Record Straight!

Bank of Greece Governor Yiannis Stournaras slammed the negotiations conducted by former finance minister Yanis Varoufakis and former chairman of the Council of Economic Advisers Nikos Theoharakis on Thursday, saying they resulted in an additional 86 billion-euro burden for the Greek people. 

Stournaras was speaking at an event organized by the Hellenic Observatory at the London School of Economics. He was responding to comments made by Theoharakis earlier in which he described the previous New Democracy government, in which he participated as finance minister, as “colonial”. 
“He (Theoharakis) failed though to admit that the ‘brave’ negotiations that he and Yanis Varoufakis led, which led to the change of the name of the troika to institutions and removed the troika from the ministries to the Hilton, had also a cost. If we assume that what he described were benefits, the cost of course was 86 billion euros,” the central banker said. 

“That was the third memorandum and the capital controls that have been imposed after 45 billion euros of deposit outflows. And these capital controls have been imposed in order to safeguard financial stability following the ‘brave’ negotiations of Mr. Theocarakis and Mr. Varoufakis. I am sorry to say that, but I had the obligation to put the record straight,” he added. 

Original in ANA-MPA.

And the response is here:

A response came from Mr. Varoufakis and Mr. Theoharakis on Friday, with the two arguing that Mr. Stournaras made an unprecedented faux pas by publicly expressing concerns about liquidity in December 2014, fueling a bank run. They added that the aim was to pressure the new government into accepting troika demands.

According to the two, Mr. Stournaras acted not as a central banker, but rather as the former Minister of the Antonis Samaras government. They also commented that they are only “responsible” for the 86-billion-euro burden if one were to believe that Greece manage to pay off the unsustainable 320 billion euro debt without additional loans.

Substantial Growth In Private Sector Hirings?

What a surprise, indeed!

All Pensions Up To 1.820 Euros Net Are Protected From Cuts?

"Pensions are cut for most Greeks", the Ekathimerini reports. However, I was confused by the following sentence found in the middle of this article:

"Only main pensions of up to 1.820 euros net (or 2.000 euros gross) are protected from cuts".

I need some assistance here. The reverse of this statement would be: "Only main pensions over 1.820 euros net will be cut". How many Greeks have pensions of over 1.820 euros net per month? There certainly are not many Austrians with pensions over that amount (excluding public sector employees with special contracts).

And here is another thing: if 2.000 euros gross per month result in 1.820 euros net, that would represent in income tax rate of only 9%. Can that be true?

I would appreciate being enlightened here!

Lax Enforcement Of Stringent European Austerity Targets Or Strict Enforcement Of More Lenient IMF Targets?

"To make things even more complicated (or absurd), the Greek government has lashed out against the IMF, despite the IMF’s more generous policy positions. Simply put, Athens prefers the potentially lax enforcement of stringent European austerity targets over the strict enforcement of more lenient IMF targets."

Here is an interesting summary by Prof. Stathis Kalyvas as to where Greece's debt negotiations presently stand.

Everything Has Been Said Already. Perhaps Not By Everyone.

I have been asked why the frequency of my articles has declined so much since the beginning of the year and I remembered a cute anecdote. The event was a speech on a subject which I do not remember but there was a panel of almost a dozen people who afterwards were asked to make their comments on the speech. When it became the turn of the last panel member, this man said with a totally straight face: "Everything has been said already but not yet by everyone". There was a second or two until the audience realized what the man had just said and then they broke out into roaring laughter.

For quite some time now, I have had the feeling that just about everything has been said about Greece by now. The discussions are becoming rather repetitive. The arguments for/against the memoranda have been exchanged endless times. The same goes for debt relief, primary surplus and all the rest of it. I miss the times when I was looking forward to reading a new article by Yanis Varoufakis expecting that I would learn a new perspective. The man now publishes zillions of articles and I hardly ever read one of them. As I said, everything has been said already.

It is almost 6 years now since I have been waiting for that magic moment where someone would stand up and present a long-term industrial development plan for Greece, particularly for the Greek private sector. A plan which would be designed by Greece but which would also carry the full support of the EU. I had high hopes that Mr. Papandreou would come forward with such a plan. Afterwards, I had high hopes that Mr. Samaras would do it. Frankly, with all the early hoopla about SYRIZA and after having had several exchanges on the subject with Yanis Varoufakis, I even had high hopes that SYRIZA would come up with such a plan. That hope, too, has now gone to history's waste basket but the truly discouraging fact is that I don't even see any such initiative being put together by the largest opposition party. Even though that party is now led by a designated Wunderkind who was expected to reform and turn around the entire country in no time.

I have now been back in Greece for 2 weeks after a 6-month absence. The conversations/discussions with friends and neighbors, once the highlights of my stay, have become somewhat stale. As I said, everything has been said already.

My sense is that there will have to be a game-changing event if things are expected to change in the foreseeable future. I haven't thought what that game-changing event could/should be but without it, Greece will continue as a slow-motion disaster.