H1 budget figures offer hope

Greece has been a source of bad news in the last two-and-a-half years but we may see some tentative positive signs for the first time since the crisis began. Although they are contingent on the cohesion of the governing coalition and a more effective way of tackling the debt crisis at the level of the European Union and European Central Bank, it is nevertheless encouraging to spot them in the midst of the deep and prolonged recession.

The lack of credibility of successive Greek governments has made the country the laughing-stock of foreign politicians, analysts and others, and hurt its reputation, costing jobs and growth. Moreover, it has made it harder for it to attain other goals such the time extension of the current program for two more years, that is, through 2016.

However, there are signs that the coalition government — despite the evident internal friction during deliberations for spending cuts — is willing to act and restore credibility. It is showing that is has the determination to forge ahead with 11.5 billion euros in spending cuts outlined in the second economic program to help meet the fiscal targets in 2013 and 2014.

Moreover, the government spearheaded by Prime Minister Antonis Samaras and Finance Minister Yannis Stournaras is showing a greater political determination to revive the privatization and public property development and sales program, and proceed with structural reforms.

On the other hand, the recession continues to take its toll with incomes suppressed and the ranks of unemployed in the private sector continuing to swell, generating resentment against the imposed austerity with political repercussions and more reform fatigue.

Yet, for the first time since the first adjustment program was put in place in May 2010, it is likely this year?s budget deficit target of the general government will be attained. At least that?s what the official figures for the first half of the year point to.

To be more precise, the budget deficit stood at 9.9 billion euros compared to 11.34 billion in the first half of 2011 although this year?s figure was burdened by 2 billion euros more in interest expenses related to the public debt. Overall, this year?s interest expenses should be lower by more than 3 billion euros following the debt restructuring (PSI), meaning there is scope for considerable interest savings in the second half of 2012. It is noted that the budget deficit ended up at 19.58 billion euros in 2011 and the target for this year is 13.7 billion euros.

There is another element in the fiscal figures of the general government — which comprises the state budget, local authorities, legal entities, social security funds and hospitals — justifying optimism. The primary deficit, which excludes interest expenses, shrank to 490 million euros in the January-June period from 4 billion the same period a year earlier.

Assuming there is a normal trend in the second half, the primary budget deficit, considered by many a more genuine fiscal indicator, can either drop further or rise but no more than 2 billion euros or 1 percent of GDP compared to 3.6 billion in 2011.

This improvement comes in the face of a deeper-than-projected recession which deprives tax revenues from state coffers but generates extra expenditures for unemployment benefits and other items. On the other hand, one may argue that the shrinking in the first-half budget deficit is partly due to the state?s unwillingness to pay its suppliers and provide tax rebates. Although this is true, one should also take into account the slow collection of income taxes compared to the previous years for political reasons, as well as various other taxes, i.e. real estate from previous years.

The positive signs from the fiscal front, which may be reinforced if the government adopts part of the 11.5-billion-euro spending cuts this year, enhancing also the chances of meeting the budget targets of the next few years, do not end here.

Last week, ECB chief Mario Draghi said that the central bank was prepared to discuss the subordination issue linked to its bond purchase program (SMP), namely to give up seniority. It is reminded that the ECB?s holdings of Greek bonds were not cut by 53.3 percent, unlike those of private investors, which amounted to preferential creditor status.

If the ECB gives up seniority, it will be subject to the same rules as all other bondholders in the case of a future sovereign debt restructuring. If this does indeed happen, it opens the door for a writedown of Greek bonds held by the eurosystem. The haircut may amount to an estimated 20-25 billion euros, going a great distance toward restoring the sustainability of Greek debt under a more adverse growth scenario until 2020 and in turn allowing the planned disbursement of IMF money assuming the program is being implemented. Of course, there are other ways to do the same, such as debt buyback.

All-in-all, there appears to be some positive news from and about Greece in the last 10 days or so. Despite internal disagreements, the coalition government agreed to forge ahead with the 11.5 billion euros spending cuts, and speed up privatizations and structural reforms.

Moreover, first-half fiscal figures showed that 2012 may be the first year Greece met its overall budget deficit (in absolute number) and primary deficit goal since it sought a bailout in May 2010 despite a much deeper-than-projected recession. Also, Draghi?s hint at the ECB giving up seniority in its bond purchase program fuelled hopes that the eurosystem may accept a haircut in its Greek bond holdings, helping restore the sustainability of the debt.

Of course, the future of Greece in the eurozone will most likely be decided by a small number of high-level European politicians in coming weeks and months. It will be to Greece?s advantage to show something concrete when the time comes.