Article G. Stournara: The need to return to primary budget surpluses

The Governor of the Bank of Greece, Giannis Stournaras, expresses his optimism for the course of the Greek economy, as can be seen from the assessments of international organizations and institutions, which will in fact help make the necessary fiscal adjustment in the post-pandemic era smooth. his article in the newspaper “I Kathimerini tis Kyriakis”.

In detail, Mr. Stournaras states:

“The pandemic crisis has highlighted the benefits of complementarity between monetary and fiscal policy in times of crisis. Simultaneous monetary and fiscal policy easing has protected the economy from the effects of the pandemic. But a return to normalcy has potentially The tightening of monetary conditions already taking place may slow economic growth, but mainly put pressure on borrowing costs, both public and private, and affect debt sustainability. public and private.

The explicit reference to Greece contained in the ECB’s December 2021 announcements is a strong message of confidence in the Greek economy and mitigates some of these risks. In essence, the ECB’s decisions provide support for Greek bonds, until they acquire an investment tier, through three channels: end of 2024, (2) the flexibility that will characterize these reinvestments, enabling the purchase of bonds in addition to their maturity, and (3) the possibility of activating new net markets under the PFP, if necessary. Apart from the above, the fact that Greek bonds will continue to be purchased during the PEPP reinvestment period until the end of 2024 suggests that their eligibility as collateral for the refinancing operations of the banking system is maintained for the same period.

The recent increase in Greek government bond yields is a general phenomenon and is due in large part to the common disturbance of changing international financial conditions. However, the sensitivity of Greek securities returns to international volatility is higher compared to securities of other countries, due to their lower credit rating. Therefore, part of the expansion of the spreads of Greek government bonds (compared to the corresponding German) is due to the fundamental size of the Greek economy.

According to the Eurosystem viability analyzes, the Greek public debt, despite its high level, shows increased resilience to various adverse macroeconomic and fiscal scenarios. In particular, the debt / GDP ratio in Greece is stabilizing and is expected to reach pre-crisis levels earlier than other countries with high debt, recording the largest decline by 2030, both in the basic and in the various alternative scenarios.

The resilience of the Greek public debt dynamics is due to the following factors:

(i) Its special features, which ensure reduced interest rate risk and limited refinancing risk over the next decade. The three memoranda concluded after the public debt crisis in 2010 resulted in the complete refinancing of the public debt with a very low weighted average (indirect) interest rate (1.4%), the extension of the weighted average repayment period to about twenty years , while the country’s public debt is held until its expiration by official bodies (states and international organizations).

(ii) In the fiscal position of the country, due to the structural budget surpluses. After the lifting of the emergency support measures taken during the pandemic and provided that no new expansionary fiscal measures are taken, Greece will return to structural primary surpluses, which will contribute positively to the declining dynamics of public debt. This feature is a result of the significant structural fiscal adjustment that has taken place in previous years, and must be maintained as the apple of our eye.

(iii) The positive contribution of the “snowball effect” (snowballleffect), ie the difference between the rate of change of nominal GDP and the indirect lending rate. including the impact of the macroeconomic environment on debt dynamics. Its contribution to the declining debt in Greece is expected to be more than double compared to other countries, on the one hand due to the disproportionately high debt (which magnifies the effect of the difference between the nominal GDP growth rate and the indirect nominal interest rate) and on the other due of the expected great positive effect that the utilization of the resources of the Recovery and Sustainability Mechanism will have on the economy.

Therefore, the increase in debt refinancing costs, even if due to the temperamental characteristics of the Greek economy, such as the lack of investment grade, is expected to have limited consequences on its viability. In particular, if only a small percentage of Greek public debt is refinanced by markets, an increase in borrowing costs will result in relatively small increases in interest expense, and therefore the impact on debt dynamics will be limited (smaller than in other countries). ). But there is no doubt that rising government bond yields are dragging down marginal borrowing costs for the private sector, such as banks and businesses.

Despite the existence of these favorable characteristics of the Greek public debt, the improvement of its sustainability by strengthening its downward dynamics should be a priority of fiscal policy in the coming years, in order to avoid a recurrence in the future (beyond the decade) debt crisis of the past and, on the other hand, not to increase the cost of private sector borrowing. After all, the long repayment period of the loans of the support mechanism (over 30 years) requires a long-term view of the sustainability of the Greek public debt, well beyond the medium-term horizon of 10 years. It should also be borne in mind that the volume of public debt is expected to increase after 2032, when the deferral period for interest payments on the EFSF loan expires. In order to address these problems, we must bring the future into the present, so that appropriate policy measures can be taken in a timely manner.

The main reason for the emphasis of fiscal policy on the declining dynamics of debt is that its degree of resilience to negative shocks in the future will be comparatively more limited, despite its projected lower level. More specifically:

(i) The current favorable characteristics of the Greek debt are not permanent. In the coming years, debt to the formal sector (which is non-market negotiable and therefore not subject to market volatility) of long repayment and low interest rates will be gradually replaced by debt to the private sector marketable, less duration and higher interest rate. So the factors that today make the Greek debt resistant to negative disturbances will gradually weaken in 10 years, despite the expected significant de-escalation as a percentage of GDP, as more and more debt will be subject to market risk.

(ii) Annual gross financing needs play an important role. In the case of Greece, where the main debt volume has not accumulated in market terms, but through low-interest loans of the official sector with extremely long repayment period, grace period and multi-year deferral of interest payments, the exclusive focus on debt / GDP ratio is disorienting. Therefore, the sustainability of public finances is also assessed on the basis of the criterion of annual gross financing needs for the year 2060. Specifically, a limit of 15% of GDP in the medium term and 20% of GDP in the long term has been established. Despite the expected steady de-escalation of the debt / GDP ratio in the coming years, gross financing needs are expected to remain significantly higher in the medium term than before the pandemic. Under the weight of additional borrowing during the pandemic period, all the scope for easing the agreed targets for permanent primary surpluses of 2% of GDP has been exhausted. Primary surpluses of this amount are also necessary in order to repay the interest on the public debt.

(iii) The contribution of the “avalanche effect” to the rate of reduction of public debt is expected to decrease in the long run, as will the change in the macroeconomic environment, as softer growth rates and increase in interest rates and lending rates are expected in the long run. Therefore, in the long run, there will be increasing pressure on fiscal policy to contribute more (through primary surpluses) to the declining debt dynamics.

Greece should take advantage of the favorable economic environment that is being formed today, which makes fiscal adjustment easier, while maintaining its anti-cyclical character and enhancing its credibility. The conditions are suitable for a decade in which Greece has covered the distance that separates it from other eurozone countries and is no longer a special case regarding the level of debt / GDP ratio. “In this light, the country must gradually return to its pre-pandemic sound fiscal position, so as not to undo the sacrifices of fiscal adjustment made over the past decade for the benefit of future generations.”