Primary surplus target reduction may be feasible but not just yet

The high primary surplus targets may be one of the toughest legacies passed down to the new administration by the Alexis Tsipras government. An agreement with creditors for reducing the target of 3.5 percent of gross domestic product is a key priority for Prime Minister Kyriakos Mitsotakis, which analysts and economists speaking to Kathimerini say is feasible but only under specific conditions.

“The reduction of the targets for the primary surpluses will be a difficult uphill road for the Greek government, mainly because the northern European states are not so willing to accept the idea of a level below 3.5 percent for the medium term,” says Mujtaba Rahman, managing director for Europe at Eurasia Group. “For the time being no such negotiation is expected, but this is possible for the targets after 2021,” he predicts.

Raffaella Tenconi, an economist at Wood, appears to agree, saying that “the maximum likely is a 0.5 percent of GDP discount for 2021 and 2022 – a short window until it drops to 2 percent,” but reminds that German Chancellor Angela Merkel “again said there is no big reason to change the goals.”

Rahman adds that “what Kyriakos Mitsotakis and his government have to do is first build a relationship of confidence with the creditors, second proceed with structural reforms so as to send the right message, and third to continue the fiscal policy and adhere to what has been agreed in order to bring to negotiation in Brussels the reductionn of targets. This is an issue concerning 2021.”

Teneo Intelligence Co-President Wolfango Piccoli comments that “only a fool would have expected a positive stance from the creditors about reducing the primary surplus target the day after the election.”

He adds that “it is too early to say whether the target can be eventually reduced in the future. But it is never too early to start doing the reforms needed to make Greece a more attractive destination for domestic and foreign investors. There is also a desperate need to develop a credible plan that can foster competitive, innovative and sustainable economic growth in Greece. Once these two tasks have been achieved, the chances of securing a better deal on the primary surplus will increase substantially. Erecting the reduction of the primary surplus to some sort of totemic target could easily become a counter-productive strategy.”

“In the meantime, Athens should look on how to make a better use of the available structural funds from the EU and consider the option of undertaking a comprehensive spending review to find additional resources,” Piccoli says to Kathimerini.

For rating agencies, what matters most for Greece is achieving stronger growth. “The euro area has reiterated that Greece needs to stick to the commitments. Stronger economic growth would of course make achieving the fiscal targets easier,” Kathrin Muehlbronner, a senior vice president at Moody’s, tells Kathimerini.

Nichola James, co-head of Sovereign Ratings at DBRS, says the Canada-based rating agency “expects the new Greek government to adhere to its medium-term primary surplus targets,” that “underpin public debt sustainability.”

“The new government envisages an acceleration in structural reforms to raise Greece’s growth potential. Faster employment and income growth may redirect focus away from the primary surpluses,” says James.