Although support for Greece's financial sector last year took the overall deficit to 7.2% of GDP, the primary balance stood at a better-than-expected 0.7% of GDP in 2015.
IHS perspective | |
Significance | Greece's general government deficit stood at 7.2% of GDP in 2015, up from 3.6% of GDP in 2014. However, the primary balance relevant for the adjustment programme showed a surplus of 0.7% of GDP, which was better than a projected deficit of 0.25% of GDP. |
Implications | The sharp increase in the deficit was mainly the result of one-off spending related to the recapitalisation of Greece's financial sector in 2015, which accounted for 4.1% of GDP. Excluding this expenditure, the deficit stood at 3.2% of GDP. |
Outlook | The Greek government is likely to point to last year's larger-than-expected primary surplus as evidence that it can be trusted on fiscal matters. However, the current negotiations between the country and its official creditors will remain difficult, and IHS does not expect last year's result to change things dramatically as the IMF's main concern is the long-term sustainability of Greece's debt levels. |
Figures released by Eurostat show Greece's general government balance posting a deficit of 7.2% of GDP in 2015, up from 3.6% of GDP in 2014. In nominal terms, the shortfall stood at EUR12.8 billion (USD14.5 billion) last year, up from a deficit of EUR6.5 billion in 2014. The sharp increase in the deficit was mainly the result of one-off spending related to the recapitalisation of Greece's financial sector in 2015, which accounted for 4.1% of GDP. Excluding this expenditure, the deficit stood at 3.2% of GDP.
General government total expenditure rose by 8.3% to EUR97.4 billion in 2015, or 55.3% of GDP. Expenditure was mainly driven by the government's support for the banking sector in late 2015. Total revenues rose by 1.3% to EUR84.7 billion, or 48.1% of GDP.
The primary balance (that is, excluding interest payments) sat at -3.4% of GDP in 2015. However, the primary balance relevant for Greece's adjustment programme (which excludes one-off support for financial institutions and also includes proceeds from privatisations of assets and revenues related to transfers from other Eurozone central banks as a result of their holdings of Greek securities) showed a surplus of 0.7% of GDP in 2015. This was better than a targeted deficit of 0.25% of GDP.
The breakdown by sub-sectors shows the central government balance worsening from EUR7.8 billion to EUR12.7 billion in 2015. The local government ran a surplus of EUR501 million, down slightly from EUR575 million in 2014. Meanwhile, social security funds, which had run a surplus of EUR761 million in 2014, had a deficit of EUR544 million last year.
The figures also show the general government gross debt, as a percentage of GDP, falling for the first time since 2012, although it remained extremely high. It sat at 176.9% of GDP by the end of 2015 (EUR311.452 billion), down from 180.1% in 2014. Loans to Greece's official creditors represented the majority of the debt (78.4%). Meanwhile, securities other than shares (excluding financial derivatives) and currency and deposits represented 19.8% and 1.8% of Greece's debt, respectively.
Outlook and implications
The size of Greece's primary surplus in 2018, when the current bailout expires, is one of the main points of contention in the current negotiations between Greece and its official creditors. The IMF is currently assessing whether to take part in the third bailout. Its participation is seen as crucial in many European countries, particularly in Germany, partly because of the technical expertise the Fund brings, but also for political reasons. In particular, German chancellor Angela Merkel may lose the Bundestag's (lower house of parliament) support on Greece without the IMF on board.
Greece and its European creditors insist that a primary surplus of 3.5% of GDP by 2018, as projected in the current bailout, is realistic. However, the IMF argues that Greece will not be able to meet that target without further action and is demanding a further EUR2.7 billion of measures, including public-sector wage cuts, value-added tax increases, and pension cuts. Although Greece argues that the extra measures should only be implemented if the fiscal target for 2018 is missed, the IMF is rightly concerned that, even if the target is met, it will be very difficult to keep the primary surplus at such a high level as the current bailout programme assumes. The IMF also argues that Greece's debt will not be sustainable without significant debt relief, an idea strongly opposed by Germany.
The Greek government is likely to point to last year's larger-than-expected primary surplus as evidence that it can be trusted on fiscal matters. However, negotiations will remain difficult and IHS does not expect last year's result to change things dramatically as the IMF's main concern is the long-term sustainability of Greece's debt levels.
Greece urgently needs the release of the funds. The latest government cash figures show arrears to the private sector totalling EUR6.1 billion during the first two months of this year. Moreover, Greece needs the funds to be released before 20 July, when Greece has to repay a EUR3.5-billion bond held by the European Central Bank.