Greece Achieves 'Primary' Surplus

 |  Includes: GREK
by: Acting Man

On Monday the Greek government released budget data according to which it has achieved a primary surplus. The stress on primary is meant to indicate that it's not an actual surplus because it arbitrarily excludes debt service costs as well as municipal and social security spending. Why one would exclude these types of spending is a bit mysterious, since there is no chance the government will ever escape those obligations outside of a default, or let us rather say, another default. Still, it has to be acknowledged that this is mildly positive news. One also has to acknowledge that given that the economy still contracted by 4.6% in Q2, achieving a budget surplus was probably not easy.

More good news emerged in the form of the sale of a state-owned asset, but the caveat here is that it was probably the easiest asset to sell, namely the state's gambling monopoly OPAP. Whether the €652 million ($864 million U.S.) the monopoly fetched represents a good price we cannot judge. For more details, check this article at the WSJ.

Here is a chart the WSJ has supplied which requires a comment.

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The Greek primary budget in pictures. It wasn't the first primary surplus achieved in recent years, but certainly the most significant one.

You will notice that the WSJ decided to propagate the myth that the Greek economy is contracting 'because of spending cuts taking their toll." This is unadulterated Keynesian balderdash. The government cannot spend what is not taken from the private sector in one way or another, therefore, whatever a government spends is exactly equal to the sum the private sector no longer has at its disposal. Granted, "GDP" statistics count government spending as a positive contribution to economic output, in spite of the fact that it represents nothing but consumption and is not adding anything to wealth, but that is the only extent to which it can be said to "depress the economy," i.e., it is a statistical quirk. Also, note this quote from the article:

"Budget spending fell to €32.7 billion from €40.8 billion in the first seven months of 2013. Income rose 11.4% to €30.8 billion."

That is certainly quite a notable decline in spending, but the only way an increase in tax revenues by 11.4% can be achieved in an economy that is shrinking by 4.6% is by raising a plethora of taxes. It is inter alia this part of "austerity" that is creating the delay in recovery: raising taxes in the middle of a depression is a really bad idea. The government should have cut spending even more and lowered taxes instead of raising them.

There is more good news from Greece though - specifically, it is the peripheral country that has experienced the steepest decline in unit labor costs. Of course that should be not too big a surprise given an unemployment rate of 27%, but it appears as though the cost of labor is getting to the point where some improvement in employment should be expected.

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An overview of Greek data (2013 data are estimates) via Der Spiegel. Unit labor costs in Greece have declined more than in any other country in the euro area's periphery.

This is noteworthy because the over-regulation of labor markets in most modern-day welfare states tends to make it quite difficult for labor market adjustments of this size to occur.

However ...

Leaked BuBa Report Predicts Another Bailout for Greece

Even after two debt haircuts in a row (including the buyback of government debt way below face value), Greece's overall level of public debt remains way too large. The government could not possibly avoid default unless it continues to receive bailout funding. No-one who looks at the situation dispassionately comes away with the conclusion that the bailout program as currently designed can possibly work. The Bundesbank occasionally leaks reports to the press to remind everyone of reality. As we know, the BuBa is not a fan of "doing whatever it takes" to keep specific nations in the common currency area. It worries mainly that the ECB will end up as the conduit for government financing and that worry is definitely justified.

As we have pointed out in July (see: "Greece - Getting More Expensive"), it is already clear that Greece will either need more bailout funding or yet another debt haircut. It simply cannot swing it otherwise. Given that the Greek government has been bankrupt 50% of the time over the past 180 years, this is actually par for the course. The BuBa comes to a similar conclusion, and argues that the only thing that has stood in the way of a bigger bailout so far is the upcoming German election. Not surprisingly, the German government didn't want to have another debate over Greece overshadowing that event.

"The German central bank, the Bundesbank, predicts that Greece will get a new rescue package shortly after the German general election on September 22. According to an internal report by the Bundesbank obtained by SPIEGEL, Europe will "most likely agree to a new credit program with Greece" by early 2014 at the latest.

In the report, compiled for the German Finance Ministry and the International Monetary Fund (IMF), the Bundesbank is critical of the latest loan tranche payout and of the analysis conducted prior to the payment by the troika consisting of the European Commission, the European Central Bank and the IMF.

The Bundesbank said the tranche was likely to have been paid as a result of "political pressures." The bank denies this is a reference to the German government, which has been at pains to stifle public debate during the election campaign about a possible Greek debt cut. Chancellor Angela Merkel's government has been stressing Greece's progress in imposing reforms in return for international financial aid.

But in its report, the Bundesbank sounds very cool about this progress. It says the risks entailed in the rescue program remain "exceptionally high." The performance of the Greek government, it adds, is "hardly satisfactory," and there are "major doubts" about Greece's ability to implement essential reforms.

In July, Greece's international lenders approved the payment of €5.7 billion ($7.6 billion), the latest tranche of its bailout money. In total, Greece has so far received more than €200 billion in financial assistance."

(emphasis added)

The essential point - and the recent achievement of a primary surplus should not detract from this - is that the reform process is indeed "hardly satisfactory." For instance, it is not quite clear why Greece needs 600,000 bureaucrats in the government's employ. Of course they represent a big voting block, but that is pretty much all they are "needed" for. The bureaucracy of Greece is notoriously inefficient, corrupt and obstructionist. The less of it there is, the better. The many licensing laws and other rules and regulations that are mainly abused to extort funds from people desperate to create wealth as entrepreneurs are a major stumbling block in the way of recovery (we have discussed these problems previously, but it is worth repeating the point:

"Greece's byzantine bureaucracy is a major stumbling block in the effort to revive the economy. Readers may recall the case of the internet company that attempted to receive the necessary license to be able operate in Greece - a license it received in the US within 24 hours of applying for it. In Greece it was faced with a several months long costly, exhausting and often truly Kafkaesque battle with the bureaucrats."

We have no new information that would indicate that anything substantial has happened to alter this situation.

One More Time to the Barbershop

One more interesting tidbit in the article at Der Spiegel (which was published one day before the news of the primary surplus were released) actually touches upon the topic of the primary surplus and how it is connected to the long planned "haircut number three" ...

"A senior source at the Greek Finance Ministry, however, told SPIEGEL ONLINE that Athens' position remains clear: the top priority is to achieve a primary budget surplus by the end of this year. After that milestone has been achieved, all options concerning the viability of Greece's debt will be back on the table. The official refused to use the term "haircut," which is nevertheless on the lips of every Greek politician in private conversations."

(emphasis added)

Holders of newly issued, post PSI Greek government debt beware - you have been warned repeatedly now. It is anyway generally speaking a dubious idea to buy government debt, since that means one is relying on income that is obtained by coercion. Therefore there is little reason to commiserate with those who get burned doing so, excepting widows and orphans who may not even be consciously aware of what they are supporting and are merely seeking an allegedly "safe" income.