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Sunday, December 23, 2012

Beware of the primary surplus!

If one goes by the Monthly Bulletin of the Ministry of Finance, the general government already had a primary surplus of 2,3 BEUR from Jan-Oct 2012. Economic analysts would argue that these figures include distortions and that the 'real' result for 2012 will be a primary deficit of around 2,5 BEUR. Either way, everyone seems to agree that sometime in 2013, Greece will reach a primary surplus in the general government accounts.

At that point, i. e. when a primary surplus is achieved, things will get tough because at that point, for the first time in years, Greece (and its creditors) will have to choose between options. One option is to live by agreements and to use any primary surplus for debt service. The other option is to use the surplus for other things.

So far, the debt service was immaterial to Greece. Whatever interest the creditors demanded, they had to first lend that money to Greece before such interest could be paid (to themselves). While that increased Greece's debt, that is sort of a moot point because it seems certain that much of that debt will have to be forgiven sooner or later. With a primary surplus, the Greek government will, for the first time, be in a position where it has to explain to their electorate why they used excess cash to pay interest instead of doing better things with it.

If and when the primary surplus is reached, Greece will have to decide whether to use it to pay interest or perhaps to invest in the economy. Should Greece decide not to use it for interest, major problems with creditors can be expected because that would violate agreements. However, perhaps the creditors will come around and see the light in the sense that it is not prudent to drain cash from a weak borrower. In restructurings, surplus cash should never be used to pay dividends. Instead, it should be used to create even more surplus cash going forward so that even more dividends can be paid in the future. The expression for that is 'investment'.

So far, an interest moratorium would have had no major impact on Greece because all it would have meant is that creditors would have had to lend less money to pay (themselves) interest. With a primary surplus, an interest moratorium starts making eminent sense.

In conclusion: as Greece is headed towards a primary surplus, very serious thought should be given (not only by Greece; also - and foremost - by its creditors) to the optimal use of that surplus. I have proposed a solution once before: transfer the primary surplus into an escrow account which is targeted for new investments.


  1. I agree. Decision time. However I disagree with the suggestion of what to do afterwards. All surplus must go to pay interest and reduce debts.Not a penny must go to anything else.The reason is simple:the money will leak and the corrupt would have won again. Just look today's papers"τρόικα-η-κυβέρνηση-έχασε-την-όρεξη-να-φορολογήσει-τους-πλούσιους". Do you honestly believe that it is possible for the money to be safeguarded by such people? Or that the investment will take place without leaks even if the money are outside the country?The corrupt must never be allowed to even appear to be winning again.And please no stories about reliable mechanisms to control money flows.For such mechanisms to exist the corrupt must be a very small percentage of the population, not the large minority (or even majority)as they are now. Only clear, indisputable, political and legal defeat can do that. And the only way to do that is to leave so little money in the economy as to force choices and make even the slightest bribe or inefficiency intolerable for long enough as to change social perceptions.

    1. I know (and agree!) that putting any surplus money into the hands of the wrong people, particularly when there are perhaps no 'right' people, is the weak point of my argument. I also agree that it can be next to impossible to undo the web of a corrupt but well established elite. The only trouble is: how does one change that in a short time frame? Even a 'clear, indisputable, political and legal defeat' might not accomplish that. There will always be successors and one can be surprised how quickly 'noble candidates' can change their profile when they see the gravy of a corrupt system from which they could now benefit.

      Still, there HAVE GOT to be ways to assure beyond reasonable doubt that any surplus money is well used. Otherwise, it would be better to give it back to foreign tax payers instead of giving it to corrupt oligarchs/cartelists/monopolists, etc. One way could be to require that such surpluses are limited to co-investments with foreign private sector companies. To share ownership with a serious partner can accomplish a lot more than all sorts of new rules and regulations, or even supervisions.

      I once described it in a post as follows: starve the existing system to death but, parallel to that, build up a new system.