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Tuesday, July 30, 2013

Primary Surplus - The End of the Process or the Beginning of the Challenge?

PM Samaras is quoted in the Ekathimerini as saying "Our top goal remains to achieve a primary surplus, not because we are being forced to do so but because we can cease borrowing and return to growth".

Well, not quite! There is still the minor detail of interest expense.

No creditor volunteers to finance the negative operating cash flow of a borrower (i. e. primary deficit). Every creditor jumps the gun when it comes to getting a share of a positive operating cash flow.

The key question is what the future primary surplus will be used for; for interest payments or for domestic growth projects. My first haunch is that all of this is already regulated in the memorandum and my second haunch is that the use of the primary surplus will be heavily tilted towards interest payments. Maybe I am wrong. That would be good news!

I have argued before that the primary surplus should be used primarily to finance new investments in the real economy; i. e. growth potential. When a borrower is on a turn-around path, excess cash should be used to finance growth so that its future debt service capability gets better. It should be used only as little as possible to pay interest to creditors and certainly not to pay dividends to shareholders.

Let me just hypothetically describe what Greece's creditors could do once there is a primary surplus:

* term-out all maturities of principal for at least 10 years (much of it as long as 30-50 years).
* capitalize all interest during the first 5 years and apply a very low rate thereafter (the remainder getting capitalized).

All the worries about Greece's debt would be eradicated overnight because there would be nothing to worry about for the next 5 years at least. In short: the entire Greek debt would be 'regularized' and all markets want to see is that debt is regularized. What happens in the secondary market with that termed-out Greek debt is of no relevance to Greece because the country wouldn't borrow at those yields. 

And Greece could then focus all its attention on the issue which really matters; namely - to get their real economy on track!


  1. As long as Greece has a current account deficit, the attempts at a government surplus merely reduce private wealth. So, even if the government achieves it's surplus, it comes at the heavy price of the economy nosediving.

    1. Yes, I agree, except that it's not only private wealth which gets reduced by a current account deficit. A current account deficit reduces NATIONAL WEALTH. Greece reduced national wealth between 2001-10 to the tune of 199 BEUR. What made it even worse is that this 'national wealth' which had been reduced was borrowed money in the first place.

    2. My point isn't that private wealth is being reduced by the current-account deficit, but rather from the *combination* of a current account deficit and a government surplus.

      The rest, I agree with, but I would like to point out that everything was working fine as long as prices of Greek assets were increasing in value. Whether that was sustainable or not is not something that can be concluded easily. However, we can conclude that it wasn't sustainable in the Eurozone and it's arrangements. The Greek elites should've known and foreseen that. If not, then they're idiots (or worse) and deserve punishment.