Recently, the New York Times reported that Greece’s economy contracted for the 20th straight quarter. Despite that, Greece just announced a budget surplus for the first seven months of 2013.
Coming after months of serious cuts to government spending, the news not only surprised analysts but also raised some hopes. After all, if the Greek government plugs at it, couldn’t the nation post its first budget surplus this year after more than ten years?
According to CNNMoney, no dice. Although the surplus was 2.6 billion euros against a deficit of 3.1 billion euros last year, these are illusory figures. Yes, spending cuts have helped. No, that hasn’t put money in the government’s coffers. In other words, this “primary surplus” does not account for what the Greek nation has paid in interest on its debt.
Even though Greece pays a discounted interest (part of the bailout agreement), that’s still on a debt that’s at 157 percent of the GDP, expected to rise to 171 percent by 2014. That’s really rather unsustainable.
Moreover, there have been serious costs to the cost-cutting measures Greece has pursued. The economy has, of course, been shrinking for over six years now. In Q2, Greek GDP fell by 4.6 percent. In this respect, the primary surplus is a modest improvement; it does mean that Greek won’t be adding on to its debt in order to pay the older one (assuming the primary surplus continues rising). Moreover, debt-to-GDP ratio would begin to decrease over time.
However, a key variable here is economic growth in the coming months. Right now, as of May, Greece posted unemployment figures of 27.6 percent. That translates to a distinct unlikelihood of some sudden economic reboot and the commencement of steady economic growth.
What that leaves is the prospect that Greece has revealed partial truths; it’s posted an impressive “budget surplus” that omits crucial details, and CNNMoney suggests the move may have been in order to elicit further debt relief from its international creditors.
After all, euro zone officials have previously stated they would consider lightening Greece’s debt burden provided the nation actually pursues budget-tightening and economic restructuring. Germany, notably, rejected this project. Now, if the budget surplus keeps rising, Greece could arguably build a case for a complete debt default.
On the one hand, it would make headlines around the world. On the other hand, Greece would ultimately be left in a good position since it’d claim a debt default right when it already has a budget surplus.
German Leak Suggests Another Bailout?
But the Irish Times reports that a recent information leak to Germany’s Der Spiegel suggests a third bailout is on the books for Greece, probably sometime early in 2014.
Germany’s Bundesbank believes current aid carries with it intolerably high risks, especially in light of Greece’s dismal failure to do much about reforming the national economy. Last month, the European Commission, along with the European Central Bank and the International Monetary Fund, gave 5.5 billion euros in aid to Greece, and the German central bank lambasted that move, calling it “politically motivated.”
Accordingly, several senior German officials have gone on record stating Greece does not require further aid. That means the recent leak is going to cause quite some controversy.
The reports emerge at a very sensitive time for Germany; it’s just six weeks until federal elections for that nation. In short, it would appear Merkel publicly opposes another bailout while privately making preparations for just such a bailout—coming conveniently after a presumed re-election.
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On the other hand, there is support for a third bailout from several noted German economists. It won’t be pretty, but it is deemed necessary. Will such aid comprise of debt forgiveness or extension of current loans? That’s not quite clear yet.
From the Irish Times:
“One isn’t supposed to discuss this politically before the election but it’s clear from an economic perspective that Greece’s sovereign debt is not sustainable,” said Dr Marcel Fratzscher, head of Berlin’s DIW economic institute.
It is clear any such future bailout will rest squarely on European taxpayers, which is what makes the whole issue very sensitive both to Greece and to Germany—and of course the rest of the euro zone.
The Telegraph puts things in stark terms:
Carsten Schneider, budget spokesman for the main German opposition party, the Social Democrats, said: “There will be a rude awakening after the election. The Chancellor is lying to people before the election when she denies that more aid is needed for Greece. This aid will lead to losses for the German taxpayer.”
Evidently, now is not a good time to put your money on a Greek rebound. Nonetheless, it is worth following developments closely.
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