Greece May Get Cruel Reward for Its Success
Greece reported recently that it has reached a primary budget surplus, the Holy Grail of austerity, meaning that once you exclude interest payments on the country’s massive debts, the government is finally taking in more revenue than it spends.
This news should be worthy of a ticker-tape parade, after three years of Draconian retrenchment and a partial writedown of privately held Greek debt. Cruelly, however, the main beneficiary of a return to primary surplus may not be Prime Minister Antonis Samaras and his pro-bailout government, but the main opposition Syriza party, which is pushing for the country to refuse further austerity measures and declare a moratorium on its debt payments.
In reality, the Finance Ministry was premature with its announcement. It said the government reached a non-consolidated primary surplus in 2012 -- but on a consolidated basis the country still ran a small deficit. Plus, the calculations exclude any IOUs the government has run up, of which there are many, particularly from the second half of last year when Greece waited for delayed bailout funding and had no other way to pay its bills.
Still, the International Monetary Fund says Greece will probably reach a true primary balance this year, a genuine achievement made at enormous cost, if you recall that Greece started the crisis in 2009 with a primary budget deficit of 10.7 percent of gross domestic product. Bringing that figure down to zero is all the more impressive given the government’s slow progress in tackling tax evasion and that Greece is in an economic depression. As a result, the vast majority of the fiscal adjustment has had to be made through severe cuts in spending.
Now Greece should be able to reap its reward. Yet one benefit that economies suffering a debt crisis normally gain from reaching a primary surplus will be unavailable, due to the nature of the debt relief that Greece has received to date.
Running a primary surplus reduces the potential cost of default. A country that doesn’t pay back its debts can expect either to lose market access entirely, or to borrow at an unsustainably high cost. This is hugely problematic if the government is running a primary deficit, because it needs to borrow money to continue running the state. A government in primary surplus, by contrast, can get along without access to debt markets.
Greece has very little short- or medium-term debt on which to default. A deal in March last year saw the vast majority of privately held Greek government debt swapped for bonds that start to come due only in 2023, and official creditors agreed in December to extend maturities on the Greek debt they hold by 15 years. For a government in power today, the possibility of default in 15 years’ time is essentially irrelevant.
The only bondholders on whom Greece could default in the next decade are the European Central Bank and a small number of holdouts from the private-sector debt restructuring last March. A default on this small amount of debt isn’t in the interests of Greece or its international creditors because the risks would far outweigh any benefits. So they are unlikely to be the sticking point in any negotiation.
From the point of view of the current government, the net result is that a primary surplus may play into the hands of Syriza, which has long argued that Greece should declare a moratorium on its debt payments and stop implementing the austerity conditions attached to the bailout.
So far, the government has been able to argue that austerity is necessary to keep the bailout loans coming, in order to fund crucial services such as health care and education. The alternative -- refusing to retrench and being cut off from international loans -- would involve Greece printing its own currency to afford these basic services, resulting in sovereign and bank defaults and a huge drop in living standards for Greeks. Samaras eventually won last year’s elections because playing along with the troika -- the ECB, the IMF and the European Commission -- and accepting further spending cuts seemed the better option.
That argument becomes more difficult to make once Greece has a primary surplus and can fund itself (provided it doesn’t have to service debt). Syriza will be able to argue that the rationale for wage, pension and spending cuts would no longer be to guarantee the provision of basic services to the Greek population, but to pay bitterly resented international creditors.
Of course, it is impossible to predict exactly how Greeks will respond to their success in eliminating the primary deficit. Samaras and his New Democracy party got a boost in opinion polls from their success in securing a partial debt-relief deal in November, and edged about a percentage point ahead of Syriza in two late last month. But if Greeks come to perceive that they are suffering purely for the benefit of creditors, they may refuse to play along any longer.
That would be a disastrous choice, because structural reform of the Greek economy is crucial not just to the country’s short-term budgetary arithmetic but to its long-term growth prospects as well. And without public support, it will be impossible to implement such change, no matter what the intentions of the government and its international creditors may be.
(Megan Greene is a Bloomberg View columnist and chief economist at Maverick Intelligence. Until 2012, she was the director of European economic research at Roubini Global Economics LLC. The opinions expressed are her own.)
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