RIP the primary surplus

Any negotiations over debt relief between Greece and the Troika can no longer focus on the primary surplus.  There is clearly a sharp contraction under way, amplified by a decline in funding for Greek banks.  Whatever primary surplus there was has surely disappeared right now.  And how the current events will play out into future values of that surplus – even on unchanged policies – is highly uncertain.  Bargains over Greek policy can’t be expresed in terms of a fuzzy forecast future primary surplus that some civil servant economist somewhere thinks those policies will generate.

The probable disappearance of that surplus weakens the Greek hand somewhat.  But not that much more.  It was already pretty weak, since the financial convulsions associated with a default would have swallowed the surplus anyway.  There has been no sign of contagion into private or sovereign spreads outside Greece, and that will also make the Troika more confident of holding its line.

The Greek behaviour post-election makes me marginally more pessimistic about a deal being reached.  Partly because there is a sense of there being a lack of coordination between Tsipras and Varoufakis, who are saying things that imply different notions of what would be an acceptable deal with the Troika.  Can they get their acts together, agree a common line, and deliver any agreement to their party?

The sense of chaos is amplified by the (to me) surprising foreign policy ploys of blocking further sanctions against Russia, irritating China, a potential lender of last resort, by cancelling the port privatisation;  and even annoying Turkey over a visit to disputed Island territories.  Perhaps these are viewed as relatively costless acts to please their followers, sweetening them before a compromise on what really matters, finance.  But they could also add to the arguments rehearsed in Northern political dinner parties that Greece can leave the euro, since it would not play a constructive role in the Eurozone political union anyway.


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