Tuesday, May 31, 2016

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.


  1. It escapes your imagination, why creditors would prefer regular interest payments, to funding a stimulus in reducing state arrears to suppliers?

    It doesn't escape mine, having watched Schäuble and various CDU/CSU luminaries on lots of German talkshows over the years.

    German political culture is inherently fiscally conservative. "Debt" is the plural of "guilt", countries within a bailout program are "Deficit-Sinners", and only the creditworthy are worthy. Minimum 20% downpayment on your mortgage, please.

    "It is often forgotten that debt can be a wonderful thing"

    Remarkably enough, the only German political party that makes this case are die Linke.

    One has to laugh, I suppose. Mario Monti's joke about economics being, for Germans, a branch of moral philosophy is funny precisely because he meant it seriously.

    And the best explanation on German TV I've ever seen of why a huge trade surplus is not a great thing? That was on "The Heute Show" satirical weekly. Expecting to hear something as simple as that from a German economist? Forget it!

    1. Sadly, expecting to hear (or read) serious economic analysis from Germans is akin to expecting the Afghans to receive all the Nobel Prizes in Physics, Chemistry etc. The country is an intellectual backwater as far as social science is concerned: the best they have is pure repetition of established techniques. The worst appears in the guise of a tax inspector turned politician in a wheelchair.

    2. I have looked at German recipients of the Nobel Prize since 1901 (see below). Almost all of them come from the natural sciences (Physics, Chemistry, Medicine). A few from literature. And from Economics I only found 2. That explains a bit.

      Whether there is any serious economic analysis in Germany depends on one's definition of what 'serious economic analysis' is. I wouldn't know how to define that. I do, however, remember a panel discussion on TV where Joe Stiglitz and Hans-Werner Sinn participated. Stiglitz went on a theatrical discourse of what you would probably consider 'serious economic analysis', and he got applause. Sinn made only two factual comments in response and an embarrassed looking Stiglitz apologized for not having expressed himself clearly.

      You always have to bear in mind that economics is not a science in the sense of natural science, simply because human psychology plays such an important role. And no one can predict human behaviour for sure; one can only guess and predict.

    3. I have seen Sinn debating with Varoufakis many years ago, and was quite shocked at his refusal to engage in economic debate and reliance upon Germanic morality tales. The man is a fraud, who collects government money for his research centre for toeing the German line. I see this as essentially no different from Greek corruption.

    4. Sinn most certainly doesn't toe the government line. He's consistently attacked the bailouts as expensive and doomed to failure, as they impose such heavy burdens, for such a long time, on Greece that it will lead to democratic collapse.

      His proposed solution, however, is quite close to the proposal that Schäuble tabled last year. A long exit from the Euro for Greece to allow external devaluation.

      But he was arguing for that since 2010.

  2. I don't quite follow your post: 3rd bailout includes a specific line (7 bn euros) for elimination of arrears to the private sector during the program.
    See http://ec.europa.eu/economy_finance/assistance_eu_ms/greek_loan_facility/pdf/assessment_financing_needs_en.pdf

    Afterwards, it is a matter for Greece not to build new arrears.

    PS: Besides, currently Greece pays interests to private creditors and to IMF. So it is not "very same creditors" who fund and receive interests

    1. Thank you for posting the very good link! I was not aware that the 7 BEUR were part of the planned application of funds. That is good news.

      What confuses me are the interest payments. The paper states that for the 3-year period August 2015 - August 2018, actual accumulated interest payments (not accrued interest!) are 16,6 BEUR. It then gives details but the details amount to 'only' 11,2 BEUR. What really surprised me is something else, though.

      I was under the impression that interest payments to EZ creditors were practically nil (deferment until 2022 at least) and that most of the interest which Greece pays goes to the IMF and to private PSI creditors. That's obviously not the case; a lot of interest payments go to EZ creditors.

      Again, thanks for the very interesting link.

    2. Has it really taken you this long, Klaus, to understand that the Germans and the Eurogroup are not interested to help Greece recover? Their concern is with sucking money out of the Greeks in perpetuity -- also known as usury. This period will go down in history as yet another shameful episode in a very dark German history.

    3. @ Anonymous at 3.45 pm
      Sadly, it is statements like yours which provoke undesirable counter reactions. Your statement is obviously inappropriate and the counter reaction is inappropriate, too (it would read: "Greece has used every trick in the book to suck money out of the EU ever since it joined the EU in 1981. All told, that is EU subsidies and debt which will never be repaid, that sucking amounts to about 500 BEUR. And that in only 30 years! Much of that sucked out money can now be found in offshore accounts owned by Greeks. Some of it can also be found in prime expensive real estate in Greece. And some of it can be found in prime expensive real estate in the capitals of the world. Yet another shameful episode in a 200-year history of misappropriating the savings of other countries".

      You are perhaps not totally wrong but the counter reaction is perhaps not totally wrong, either.

    4. I don't see the statement as inappropriate in any way. Even the IMF has come to see the extreme error of its ways in handling the Greek debt crisis. The Germans continue to behave in an arrogant and abusive manner.

      As for the alleged counterargument, it is no counterargument at all. Nobody in his right mind would deny that the political elites of Pasok and ND engaged in systematic corruption and misuse of public moneys. The problem is that this also involved German politicians and businessmen (along with other European natioalities, of course) and that the corruption was well known by the European Commission, the French and the Germans. They chose to say and do nothing, other than promote it.

      Do you not recall in 1999 when the entire Commission had to resign over its systematic corruption? The claim that this is found only in Greece is just laughable. Europe has turned into a corrupt and venous continent, with Germany leading the way.

    5. @ Anonymous at 6.17 pm
      Oh yes, corruption is everywhere. Not even Denmark, a top performer, gets a perfect rating of 100 on Transparency International's surveys. Below is the 2015 Corruption Perception Index compiled by Transparency International. I am sure you will find this information enlightening.


    6. This comment war erronously deleted.

      Jerome Druesne has left a new comment on your post "Greece's Primary Surplus":


      You are right, there were still a lot of interest payment to EZ in the summer 2015 agreement, but it is worth looking the measures presented in last EG in parallel.

      Total interests to EZ btw jul 2015 & jul 2018: 2.9 bn (ANFA/SMP) + 1.8 bn on the (EFSF) + 1 bn (bilateral/GLF loan) + 1 bn (ESM), that's 6.7bn

      But they would get back 7.7 bn profit on the SMP/ANFA bonds (that's the 1.7bn aforementioned + the difference between the purchase price by ECB on the market and the par). And this is not a loan to be reimbursed. Basically, Greece gets zero in terest on SMP bonds + debt cancellation on the part above ECB purchase price.

      Still, I admit to be confused about the formulation in the press conference of this EG:
      They did not mention 7.7bn but SMP 2014 profits(1.8 bn) + transfer of ANFA and SMP profits to Greece "as of budget year 2017".
      Does it mean 2015 and 2016 profits wont be transferred? or that the transfer (including for 2015/2016) will happen in 2017? and will the profits after 2018 also be transferred?
      Since those bonds in SMP portfolio are progressively maturing, the profits are shrinking each year, but French cours des comptes projected that there will still be some profits in 2020-2025

      All in all, if the review is successfully concluded (and if 2015/2016 profits are included), Greece will receive more grants from SMP profits than the interests they have to pay to EZ

    7. Re last paragraph: that may well be the case but my confusion remains. I have read innumerable times that most of the EZ debt had an interest moratorium at least until 2022. Moratorium means zero interest expense (before ECB refunds). The amounts listed certainly have nothing to do with a zero interest rate.

    8. I also do not have a clear view on the scope of the interest deferral.
      I think it is only for EFSF loans, except the 11bn which were used during the PSI to purchase and cancel some GGBs, but not for the newer loans by ESM nor the bilateral loans(GLF), and not for the GGBs purchased by ECB obviously.

    9. Το Mr. Kastner, Mr. Druesne,

      Mr. Druesne's paper is correct. Here is analytical breakdown for Greece's payments in 2016, by month and category:


      The article's title is "interests the 50% of the amount that Greece will pay for debt service".

      In total, 6,5 bn in capital, 5,9 bn in interests, amounting to 7.5% of GDP in total. Going more into detail about the interest part:

      1) 856 millions for bonds that didn't partecipate in PSI.
      2) 1.05 billion to eurosystem.
      3) 475 million to IMF.
      4) 3.1 billon for other loans.

      The article, explains and i think this solves the issue of generalizing, that the moratorium affects the ESM loans. However, unless my memory fails me, Greece under George Papandreou, had received the first loans before the final form of the ESM regulation, which was made at the times of inclusion of Ireland, Portugal, Cyprus. And the original loans must be excluded from the moratorium.

    10. Addendum: To my above comment citing Kathimerini newspaper, i would add this: SYRIZA coming to power, was a looming disaster for those with a minimum of insight, from an economic point of view. However, from a political point of view, it is beneficial too. Because it demonstrates the hollow words of the left and the empty promices of 50 years, based on the myth of the defeated who never got a chance to bring you paradise.

      Just like Che Guevara became international legend among the left, because he failed (what if!), the same had happened to Greece, reinforced by the other legend of the greek left, Andreas Papandreou, who indeed brought a sort of leftist paradise to Greece, the easy way (preying on the low debt left to him by the right and the entry to the EEC at the time, which was also made thanks to the right).

      While Tsipras doesn't have to face the organized mobs by opposition, as he did to Papandreou and Samaras, there is a boiling anger everywhere, that remains unexpressed because there is nobody convincing to harvest this current. However, you can't forever sell false hope to a population. The natural order of things at this pace, would be Tsipras, Mitsotakis, Grexit. Some even dare say that anomalous situations may occur, because the current political parties are burning one after the other. Mitsotakis is the last reserve. If the population doesn't see the light, i think there will be radical changes in the political life of Greece.

  3. My counter reaction to the usury remark is, "stop paying".

    1. Usury implies that the borrower is being exploited because of his weak and vulnerable situation, forcing him to deal with crooks. I leave it to others to determine if that is an accurate description of German behaviour.

    Klaus, I can follow and agree with you until your last para.
    I will skirt around the "short term stimulus" as we may not have the same perception of it. I consider a shoot of good whisky to be a potent short term stimulus, but I don't advocate it before a Marathon.
    The domestic creditors to the 7 BIO are companies or persons who have delivered services/goods to the state or paid to much tax. You claim that the payment of the arrears will cause a higher flow of money into the state coffers and that the state will be willing to part with them for paying their external debt. History has until this very moment proven you wrong. Since Greece has not presented a new business model, the future will also prove you wrong. The money will end on accounts or as consumption, preferably foreign. You have again reduced the problem to a liquidity one, "the business is sound, if we inject some more money into it we will be generously rewarded".
    Yes, "debt can be a wonderful thing", Greeks can second that.

    1. I didn't want to suggest that repayment or arrears will directly generate money for state coffers. Eventually perhaps a bit, but not immediately. I meant there there will be more liquidity in the economy. The recipients of these payments will do something with the money. Perhaps pay back bank loans (which reduces their interest expense and increases profitability). Or pay overdue wages & salaries (which will put more money to spend into the consumers' pockets). Or extend more buyers' credit to their customers and increase sales. Etc. etc. Of course there is also the chance than an entrepreneur will collect his past-due's from the state and immediately transfer them offshore.

      Some of the above may eventually lead to more tax revenue for the state but that wasn't really my point. My point was simply that 7 BEUR more liquidity in the real economy ought to have some kind of a positive effect.

  5. I took your words to describe 2 alternatives to the external creditors.
    1. Get your interests now.
    2. Invest them in the internal creditors who "might make higher interest payments in the future possible", your recommendation.
    Alternative 2 does not exist in my opinion, not with the present business model and attitude.
    That the "7 BIO more liquidity in the real economy has a positive effect" is true, for the recipients, but not for the external creditors.
    There is no lack of liquidity in the real economy, the 7 BIO is a drop in the ocean. In no other country do you have more cash per capita slushing around, and more reluctance to part with it. All transactions are now carried out in real time, I hand you the money with my right hand and receive the goods in my left. How do you think the society and businesses work in spite of the capital controls? And no, they are not going to pay their creditors, it is more likely that at this very moment they are doing their very best to increase their debt to the state, banks, social funds and others. The philosophy being that when the feces hit the fan, no debt will ever be repaid.

  6. I don't see how 2 out of 47 awarded economy rewards can explain anything. Economic science is not that, it is religion. There is no Nobel prize as such for it. The "Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel" is paid for, and was introduced in 1969 by Sweden's central bank.
    The latest degradation of economic pseudo-science was when A. Tsipras received a "doctor honoris causa" in political economy from Izmir university. Most PM's, and other top politicians, of Greece have had degrees in economy.

  7. Well at least one of the many loopholes has been closed now. Tax returns will be used to cover outstanding ENFIA property taxes.
    That is of cause unless it is declared un-constitutional.