The next few weeks will be interesting to see whether or not the European Union and the European Central Bank really care about the wellbeing of Greece and the Greek economy.
The original reason for the bailout of Greece was to ‘protect the country’ and to ensure the EU-member would have a fair chance to sort all of its issues out. Contrary to what most people (including us) expected, the country was indeed able to put itself back on track, and the budget results of fiscal 2016 are emphasizing Greece is indeed doing much better.
The primary surplus, which is the budget result excluding the cost of servicing the debt position, reached 2% of the Gross Domestic Product in 2016. That’s 300% higher (!) than the surplus that was required by its lenders. This also offers some sort of reassurance to see Greece meet the surplus requirement of 1.75% this year, but reaching a primary surplus of 3.5% in 2018 would be quite a stretch. Quite a stretch, but not impossible as for instance the USA, Belgium and Greece enjoyed a 3% primary surplus in the nineties.
This opinion is being shared with the International Monetary Fund, which is still considering its options whether or not it wants to participate in a third bailout package, after refusing to be part of the second bailout in 2015. The IMF openly doubts the possibility to reach the 3.5% number without additional austerity measures and more debt relief. The additional austerity measures are directly opposed to the more lenient approach requested by Greece. On top of that, we’re uncertain how more debt relief will increase the primary surplus, as the primary surplus discusses the budget before taking the debt-related expenses into account.
It is pretty obvious more actions are needed, and the IMF would like to see Greece transform its personal tax system as the supranational organization claims it’s actually ‘inviting’ Greeks to avoid taxes, but it’s always a thin line between reducing the tax rate, hoping the size of the taxable (and declared) income would increase, offsetting the impact from a lower marginal tax rate. We wouldn’t count too much on the IMF stepping back into the next phase of the bailout program as it wasn’t particularly pleased when the Greek prime minister decided to give the pensioners a one-time bonus of almost 400 EUR each. Tsipras argued the payment was made after a self-proclaimed ‘extra surplus’ was created in 2016.
It does look like we will see a heads-on collision between Greece, its European lenders and the IMF this year, and we would expect the IMF to continue to refuse to participate in the next bailout-round. It’s in the EU’s best interest to continue to work with Greece, as the country seems to be trying to do its best and refusing a new bailout package my push the country over the cliff. And that’s really something the ruling Syriza party – which is already losing votes in polls – can’t use, whilst the European Union would obviously like to avoid another political impasse in one of its countries.
In fact, helping Greece out in the next bailout round could help to keep the current government in the saddle. After all, it would be possible for Greece to qualify for the ECB-initiated purchases of government bonds, which could significantly lower the cost of debt of the country, and improve the situation beyond just the primary surplus.
Greece still has a few more months as the first large repayment is due in the third quarter. But if the negotiations don’t start soon, the country might very well end up in a new death spiral.
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