Greek Budget Deficit Shrinks

Greek central government deficit narrows in January-September, revenues stagnate | Reuters.

Greek Budget Deficit Narrows 42% –

The WSJ is spinning this as good news, but the Reuters article is more realistic. Both outlets miss the most important reason for the decrease.

These are the three reasons that the budget deficit shrank:

  1. The government achieved a 9% reduction in spending.
  2. Revenues did not keep pace with the drop in GDP but remained the same.
  3. The bailout which took effect in March drastically cut Greece’s interest costs on its debt.

The problem with the first reason is that the spending cuts will undoubtedly cause an even further decrease in Greek GDP next year reducing government revenues even more. Rather than seeing a light at the end of the tunnel, the Greek fiscal and economic situation will worsen.

Revenues managed to remain stagnant but the enacted tax increases were actually forecasted to raise revenues, which means that the effect of the second reason will wear off. Tax receipts remained the same because the economy is shrinking and tax evasion is rising.

Going forward, it appears that Greece has squeezed all of the blood from the stone that it can. Efforts to raise revenue have hit a wall, and tax receipts will no longer rise despite efforts to do so in the new budget. Therefore, the budget situation will only continue to deteriorate through next year.

Reason number three is not mentioned in either article, but it is the most important. The good news is that it is a permanent reduction in interest costs which will benefit Greece for the next few years. The bad news is that even with this savings, the country will never achieve a sustainable debt load.

The troika is not arguing amongst themselves regarding what constitutes a sustainable debt load. Do not fall for this canard. What they are really discussing is a way to kick the can down the road a little further.

Greece will eventually default on this debt, because servicing it has become impossible without further handouts from the troika. The eurozone, ECB and IMF will run out of the political juice to keep extending Greece aid and will be forced to cut it off sooner or later.

When this occurs, there will be a default. The only way I see Greece being able to pay its debts is for it to become a permanent ward of the troika with cash payments every year for the foreseeable future. I do not believe that northern tier taxpayers will stand for this.




2 thoughts on “Greek Budget Deficit Shrinks

  1. I really don’t think they are arguing amongst themselves about what constitutes a sustainable debt.

    They may be arguing about how many new 5€ bills to print for the new series. 1€bills and 2€bills were never printed despite the requests from governments like that of (gasp) Greece, and now I have a hunch that the new Europa series will bring some cosy surprises, starting at 5€.

    • The arguments are part of the negotiation process. The IMF wants them to stick to the goal of 120% of GDP by 2020, and the EU wants to increase it to 125% by 2022. Either way, I just don’t see Greece moving in a trajectory to come anywhere close. They will have to default.

      I don’t follow your comments on the coin minting/bill printing. Can you give me more color?

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