According to Greece’s finance ministry, in 2012 Greece’s government was able to record its first primary surplus in years. This is a measure of a budget based on revenue minus expenditure excluding interest costs and is commonly thought of a measure of fiscal sustainability. During the sovereign debt crisis, it has often been said that Italy has a primary budget surplus but that it’s interest costs were the key impediment to further deficit reduction. The actual deficit for 2012 was 6.6 percent of GDP. So that is significantly above the three percent hurdle. The target for 2013, according to Handelsblatt is expected to be between 5.2 and 5.4 percent of GDP. At the start of the crisis, Greece had a deficit of 15.4 percent of GDP.
In Greece’s case, this information should have two implications. First, given that Greece pays the highest yields on government debt in the euro zone by a wide margin, it is important for Greece’s fiscal sustainability that these interest rates go down. Since Greece has already done the heavy lifting in getting to a primary surplus, the country is now in the position that Italy is in with the deficit caused by high debt levels and the corresponding interest payments. Getting yields down will significantly improve Greece’s ability to exit its economic death spiral. Second, if this primary deficit is indeed something that can be sustained, I would expect Greece’s interest rates to drop. In fact, because Greece trades at such a wide margin to all other euro zone debt, I would expect Greece to converge considerably toward the rest of Europe.
Let’s make this another one of my ten surprises for 2013, that the sovereign debt of Greece will outpeforrm all other eurozone debt as yields come down in Greece.
Further, I would expect that should Greece continue to achieve this primary surplus goal, the country could in fact be eligible for some measure of official support in an effort to help Greece qualify for an OMT program at some later date down the line. Greece cannot qualify now because it is excluded from the capital markets. So the first step by policy makers to help Greece qualify would be to get yields down low enough that there is appetite for Greek sovereign debt issues in the sovereign bond markets at auction. We should now be looking for signs that this kind of move is under discussion.