Blue skies (with a few clouds) over Athens

Greece — time to look on the bright side

Well, a deal is done. It wasn’t a pretty process, or well-handled, or sensible. But there is a deal. And any deal was better than no deal. Every commentator seems to be saying that the deal which was struck will be disastrous for Greece. But I think those predictions might be wrong.

Assuming that the leaked deal is about right, and that it can be passed by the Greek parliament (and the loans approved by Germany, Finland etc), it seems more likely than not that we’ll see a sharp rebound in economic growth in Q4 of this year. These are my reasons for saying so:

1. Government spending will be stimulative. What? This was meant to be the crippling austerity programme wasn’t it? Look at the numbers, not the propaganda. The primary surplus target for this year will be around 1% of GDP. That’s against a debt service cost of around 3–4%. So the total fiscal position is a deficit of about 2% of GDP. A lot of the debt service money goes to the ECB and IMF, it’s true, but enough of the outstanding GGBs are owned by Greek residents to make it likely that the fiscal stance right now is stimulative, not contractionary. All the debate has been over the primary balance, which is the correct way to look at it for a number of purposes, but debt service money is real money, and can’t be ignored when you’re trying to work out the total effect of G in the national income accounting identity.
   Added to this, it’s worth remembering that for the first half of 2015, the Greek government has been running monthly primary surpluses in the face of falling tax revenues, simply because it’s been trying to scratch together enough cash to pay bond coupons as they fell due. The way the government has been doing this has been by “stretching its receivables” — delaying payment on any bills which could be delayed. Now that a proper funding arrangement is in place, these bills can be settled, so there is actually quite a significant positive cash flow effect in the second half of the year from government spending.
2. The Greek banking system is *not* broken. Although the branches are closed, the ATMs are limited and capital controls are in place, these are the results of a government crisis that spread to the banks, not a banking crisis that spread to the government. The underlying solvency position of the Greek banks is all right, as long as one counts their holdings of government debt and tax credits as being worth somewhere roughly in line with the number in the accounts. If the ECB normalises the arrangements for Emergency Liquidity Assistance, and if deposits start to flow back, then there is no reason to expect that the banks are going to be unable to provide working capital or credit to the real economy.
3. Flight capital moves both ways. A lot of the objection to the new arrangements for privatisations and land sales seem to hang on a view that the government should try to hold out for someone’s view of the best possible price, rather than selling off everything for cheap. While this might make sense in a perfect world, the advantages of avoiding the “fire sale” approach are overstated. The Greek government retains the right to tax the profits made by businesses and real estate assets located in Greece, after all. If the assets are sold off at attractive prices, then we would expect that Greek offshore money would come back, potentially quite quickly. The counterpart to a “reverse capital flight” is an improvement of the current account balance.
4. There is potentially a lot of pent up investment demand. It is fashionable, particularly among people who are cutting and pasting whole sections of their analysis of the USA and Britain into their Greece analysis, to deride any consideration of the effect of fiscal uncertainty as being an “appeal to Confidence Fairies”. But Greece has spent the last six months living under the shadow of a currency crisis. Of course that affects investment. Just like of course it affects tax collection and of course it affects payment culture for the banks’ non-performing loans. Moving Greece away from the edge of the precipice is very likely to have a positive effect on investment spending.

So, if we believe in the national income accounting identity Y=C+I+G+X, then we have positive outlooks for G, I, and X written into the numbers. I think it very much makes sense to look for a bounce back, quite soon.

Now, there are a lot of caveats here. The forces which work in the direction of optimism for the near term don’t all stretch out into the medium term. In particular, the primary surpluses are scheduled to rise, and the new agreement has (stupidly) incorporated a debt-brake sort of idea — a kind of “automatic destabiliser” to cut spending if the surplus targets are missed. So for 2016 and onward, the I and X components might have to take on more of the work, if the Eurogroup turns out to be determined to go through with a bad idea on G.

Also, I’m assuming that the agreement of a three-year deal will, at a minimum, postpone the next crisis for three years. If Greek politics breaks down during that time — and particularly if the agreement itself brings down the government — then none of the benefits are likely to show up.

But, with a bit of good will and good sense, things look a lot better than they did a week ago. The outlook isn’t all bad, by any means.