While the Greek government is crowing that it has achieved a primary surplus and the economy will begin to recover next year, skepticism abounds in some quarters still, particularly in a report in CNN Money which said the statistic isn’t as promising as it seems.
The surplus reached 2.6 billion euros (or $3.5 billion), compared with a deficit of 3.1 billion euros a year earlier, the Greek Finance Ministry reported but CNN noted that doesn’t include interest payments, which are the bulk of what’s owed, nor municipal budgets or the government social security system costs.
Although spending cuts have helped create a budget surplus for Greece, there΄s really no extra cash in the government΄s coffers. And while Greece pays a discounted rate of interest as part of its bailout package the payments are still substantial because of the scale of its debt. It currently stands at 157% of GDP and is expected to rise to 171% by the end of this year, David Beim, a finance professor at Columbia University told CNN.
“The overall point is the Greek debt situation is completely unsustainable,” said Beim, adding that a quicker way for Greece to return to prosperity is for the country follow in the paths of Brazil and Mexico in the 1980’s when the countries defaulted on their debts, although they had their own currency they could devalue and Greece is pegged to the euro and would have to return to the drachma, a scenario Prime Minister Antonis Samaras would create a catastrophe and destroy what’s left of the economy.
Greece΄s government might be spending much less, but it comes at huge costs to the economy, which has been shrinking for the past six years. During the second quarter, GDP contracted by 4.6% and many doubt whether the economy will be able to return to growth in 2014.
The report said that while a primary surplus would be a major — if somewhat technical – milestone for any country trying to prove it can manage its debt, it signals the country won΄t have to take on new debt to pay for the old one; if the primary surplus rises substantially higher, the debt to GDP ratio would fall substantial, said Jacob Kirkegaard, a senior fellow with the Peterson Institute for International Economics.
Greece isn΄t out of its slump, but Kirkegaard said thinks Greece΄s surplus is nonetheless a “sign that the fiscal stabilization in Greece has almost been reached. In that sense this is good news for Athens.”
That, however, depends how quickly the economy might grow months from now. For Greece, where the jobless rate reach a record 27.6% in May, the chances of a return to economic prosperity look pretty far away.
Greece is hoping the results will boost its case with its international lenders that it’s making progress on reforms needed to keep rescue loans coming as part of a second bailout of $173 billion, although a report from the Bundesbank, Germany’s central bank, said a third package might be needed. Greece also still might need to write down its debt by imposing losses on the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) which is putting up the bailouts, but that’s been ruled out by Germany, the biggest contributor.
But as Greece looks for more debt relief, officials are using the surplus to do anything but default, it was said.
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