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Megan McArdle

Greece's Surplus Opens Door to Default

Photographer: Angelos Tzortzinis/Bloomberg.

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Photographer: Angelos Tzortzinis/Bloomberg.

Greece has a primary surplus for the first time in, well, a very long time. The budget, mind you, is still in deficit, after social security payments, interest on the debt, and payments to local government. Nonetheless, this is a major achievement. Greece may still be borrowing to fund its debt payments, but at least it's not also borrowing to fund new spending. The government has slashed spending by 8 billion euros, or 20 percent, for the first seven months of the year while tax revenue has risen about 11 percent, to 30.8 billion euros. A gap of 1.9 billion euros remains between outflow and inflow, but this represents a substantial improvement over recent years.

The Wall Street Journal speculates that this may open up new discussions with Germany about further rounds of debt restructuring. German officials, who are six weeks away from an election, insist that another round of principal writedowns is “out of the question.” But of course, a primary surplus opens up another intriguing possibility: default. As long as the country still needed to borrow money to fund current operations, default was effectively impossible; refusing to pay creditors would simply mean even more austerity, as the remaining trickle of money suddenly stopped. But depending on whether revenue growth continues, and the state of their social security system, there’s at least a chance that in the near future, Greece will be able to make itself better off by stiffing its creditors. Given the unpopularity of austerity reforms in Greece, unless the Germans come back to the table, I’d expect to hear talk of default coming from the Aegean sometime soon.

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