Needs must when the troika drives: Greece records a budget surplus in January 2013

Posted by Tim Congdon in News Archive | 0 comments

The Greek government recorded a surplus on its finances in January, an apparently heartening development in the continuing Eurozone melodrama. The surplus was the result of huge cuts in expenditure combined with the seasonal pattern of tax payments, which has the effect of making January a month of unusually high tax receipts in every financial year. (Greece had a budget surplus in January 2010, also.) Key decisions on Greek public finances are now being taken by the troika, the group of international bodies (the International Monetary Fund,  the  European Commission and  the  European Central  Bank)  acting  more  or  less  in  unison  to  ensure  that  financially distressed Eurozone countries can honour (some of) their international debts. Can  these  organizations  at  last  start  celebrating?  Is  austerity  having  the desired effects?

In fact, the wider macroeconomic background in Greece remains appalling. The  January  outturn  is  unsustainable,  and  reflects  both  desperation  and severe fiscal trauma. Needs must when the troika drives. Tax revenues were lower,  by over  9%,  in  January  2013  than  a  year  earlier.  The  surplus  was ‘achieved’ only by a fall of over 20% in expenditure, from €5,362m. in January 2012 to €4,239m. last month. It should also be emphasized that in January 2011 expenditure was €8,408m. In other words, Greek government expenditure at the start of 2013 was half (yes!) the level of two years ago. The Greek state is having difficulty controlling its borders, with immigrants widely reported to be responsible for a crime wave. There is still a high risk that Greece and/or Cyprus will leave the Eurozone.

Greek public finances in early 2013

Greek  government revenue for January 2013  was €4,418m., as opposed to €4,872m. in January 2012, a drop of 9.3%. The figure was also well below those for January 2011 (€5,122m.) and January 2010 (€5,680m.). Despite concern about the slump in the tax take expressed in the international press, the January 2013 result was – interestingly – only just below the troika’s ‘target’ figure of €4,437m. Expenditure for January 2013 was €4,239m, as opposed to €5,362m a year ago and €8,408m. in January 2011. This was a drop of over 20% on 2012 and roughly 50% (!) on 2011. It was also below the ‘target’ figure of €5,310m. At any rate, revenue was above expenditure, with a surplus in the month of almost €200m.

Before anyone opens the champagne bottles (and a 50% fall in public spending in two years cannot have brought great joy to those who depend on government largesse, in its various forms), it should be noticed that January’s public finance numbers are typically much better than those for the year on average. January 2010 also reported a surplus, but a vast deficit was registered for the year a whole.

Immigration into Greece

Cuts in civil service pay and outlays on administrative infrastructure have been part of the reduction in public expenditure. It seems that in some areas of Greece the basic institutions of law and order, and of public safety more generally, are not working in the normal way. Although crude barriers (high wooden fences etc.) are now reportedly being erected, the Greek official machine has for many years had great difficulty in ‘controlling its borders’. Of course, in the Greek case the notion of ‘borders’ is somewhat elusive. Greece is nation with scores of small islands, and fishing boats and pleasure craft can readily transport people from neighbouring countries (or even from African states) into it.

It is widely believed that Greece has about one million illegal immigrants, on top of roughly the same number of legal immigrants. The immigrants (from such nations as Albania and Bulgaria) are usually young and poor. Although they may be seeking work in the long run, their immediate economic situation is often desperate, and they may turn to crime (or semi- criminal activities) to make ends meet. The financial crisis has made matters worse, because many families have withdrawn savings from the banks in the expectation that the banks will be unable to repay deposits in full. Large sums of cash ‘under the mattress’ can be stolen by small-time burglars, whereas deposits are book-entries that cannot be stolen. (Criminals can of course break into banks to steal their vault cash, but that may require an almost military level of force and organization.) Gangs from Albania, Bulgaria and Romania are commonly cited as responsible for the current crime wave.

Problems of law and order, and xenophobia

According to Wikipedia, ‘Official statistics show that immigrants are responsible for about half of the criminal activity in Greece.’ The latest figures show that almost 52% of homicides and robberies committed in 2010/11 were the work of foreigners, and in 2011/12 the ratio was somewhat higher. Greek prisons do not hold many people (about 12,500), but of these almost 8,000 are foreigners and 4,000 are illegal immigrants.

The Greek minister for public order, Nikolaos Dendias, has said in Parliament that Greece ‘is in a state of absolute danger, in a state of total overthrow of the social structure because of immigration’. Numerous reports have appeared about increasing police brutality. The police have on more than one occasion confused bona fide tourists with illegal immigrants and beaten them up.

Open speculation that Cypriot banks will not repay deposits at par

Because of the ending of exchange controls and the introduction of the euro, payments between Greece and Cyprus have been unrestricted for many years, and the Greek and Cypriot banking systems are closely interlinked. It has been widely reported that Cypriot banks are insolvent, with a capital deficiency which in aggregate is similar to Cyprus’s gross domestic product. (We are talking about €15b. – €20b.)

Not surprisingly, Europe’s creditor nations are unenthusiastic about ‘bailing out Cyprus’, just as they were unenthusiastic about ‘bailing out Greece’. Open speculation has appeared in international media that the depositors of Cypriot banks will have to suffer a loss in order both that accounting realities can be recognized and that the size of the foreign aid package can be limited to a figure that is acceptable to international creditors. An extra dimension here is that banks in Cyprus have taken a high proportion of their deposits from  foreigners, particularly Russians.  It is widely alleged that much of this money is ‘dirty’, to a greater or lesser degree, and that the banks in Cyprus have turned a blind eye to money-laundering on their premises. German taxpayers do not want to ‘bail out’ Cypriot banks, if the true beneficiaries are Russian gangsters. (In effect, Russian depositors are pitted against the German state. Amazingly, the Osnabruck University Euro Crisis Monitor shows that the deficit of Cyprus’s banks in the TARGET2 system [i.e., in the accounts of the ECB] was lower at €7.5b. in January 2013 than it was in spring 2012. The talk about not repaying deposits at par ought – logically – to lead to a run on Cypriot banks which forces them to borrow on a larger scale from the ECB. Cypriot bank borrowing from the ECB should – also logically – be rising rapidly. But that seems not to be the case.)

Greece and Cyprus: could they leave the Eurozone together?

Participants in financial markets have become weary with forecasts of Eurozone break-up. (I plead guilty to making many such forecasts, although for several years always accompanied by a warning that I have been wrong on the many past occasions that I have made them!) However, the plight of Greece and Cyprus at present does suggest that some sort of endgame is imminent. Greece’s budget surplus – if only for one month – is worth mentioning, but it cannot be overlooked that public spending has been halved in two years, and the political and financial stability of both Greece and Cyprus is in jeopardy.

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