Last week saw at least two public clashes and one official announcement (link in Greek) regarding the primary surplus (or more generally the primary balance). In the majority of countries that would occur perhaps once every quarter and there certainly would not be public disagreement over the accuracy of the official statistics. In Greece in 2014 however, it is almost a weekly occurrence. With so many different numbers and so many different reports it is not surprising then that readers often find themselves at a loss (as do many journalists) over what the primary balance actually is and how it is calculated. What follows is a guide for the uninitiated.

What is the primary balance and why is it important?

Every country has revenue and expenditures that are recorded on a monthly, quarterly, and annual basis. Expenditures include spending on wages, pensions, goods, and services. Taxes usually make up the largest part of revenue. The primary balance is equal to revenue minus expenditures and is either in surplus (+) or deficit (-) for a particular time period. If expenditures are greater than revenue, then there is a primary deficit, if the opposite is the case, then there is a primary surplus. Since it fluctuates, it is simpler to refer to it as the primary balance unless it’s already known if it has a negative or positive value.

The primary balance does not include national debt servicing costs (principal and interest). The primary balance is not the same as the budget balance, which does include debt payments and is also calculated at regular intervals. When the terms “deficit” or “surplus” without an additional qualifier are used, they are in reference to the budget balance, not the primary balance.

The existence of a primary surplus affords a country the opportunity to begin paying off a portion of its debt. In the event of a primary deficit it must borrow more to meet its expenditures. Unlike most other countries however, Greece lost the ability to borrow from the markets in 2010 due to its excessive debt. Therefore it must – under strict conditions – borrow from the European Union and the International Monetary Fund (these are the so called memoranda of understanding with the troika). One of the conditions for this borrowing to be continued is that specific yearly targets are met for the primary balance (specifically its size in relation to the size of the economy).

That is the main reason that there is so much attention paid to the primary balance. Its calculation, however, is far from a simple task.

 

How is it calculated and by whom?

There are two main methods of calculating the primary balance: cash-based and accrual. The European Commision explains the differences:

  • In cash accounting, transactions are recorded only when cash is received or paid out. Cash accounting does not distinguish (whereas accrual accounts do) between the purchase of an asset and the payment of an expense — both would be simply ‘payments’
  • In the accrual accounts, transactions are recognised when they occur: if an EU-funded project sends a bill in December, it will be recorded that month, even if the payment is to be made the following year.

The differences between the two methods above may result in significantly different results. For example with cash accounting, when the state delays paying its suppliers, it may receive goods and equipment yet the expenses will not be recorded until the bills are paid. In contrast, with accrual accounts the expenditures are registered on delivery of the goods.

The official European statistics for the Greek state are produced by the Hellenic Statistical Authority (ELSTAT). When ELSTAT – which since 2010 is no longer a branch of the Greek Finance Ministry but operates as an independent body – announces data with a delay of several months, it has been calculated according to the method of accrual accounting. The methodology it uses is the European System of Accounting (ESA 95). For instance, the data for the final quarter of 2013 will be published in mid April 2014. Eurostat uses the same methodology for the calculation of primary balances. The equivalent data that is registered by Eurostat every quarter comes directly from ELSTAT. The data produced by ELSTAT is for the general government sector which is different from what we normally term the ‘state’. Specifically:

“The general government sector includes all institutional units whose output is intended for individual and collective consumption and mainly financed by compulsory payments made by units belonging to other sectors, and/or all institutional units principally engaged in the redistribution of national income and wealth. The general government sector is subdivided into four subsectors: central government, state government, local government, and social security funds.” (From Wikipedia)

On the other hand, when the Finance Ministry announces results a few weeks after the end of each month (i.e. sooner than ELSTAT), the majority of these have been calculated according to the cash method although it also makes some estimates using the ESA 95 methodology (amongst these are calculations of the primary balance). The ministry also uses a different questionnaire from ELSTAT. Furthermore the ministry publishes data from the state budget and the general government sector separately.

Thus, the ministry regularly announces two different primary balances (one for the state and one for the general government sector) and with two different methodologies (cash accounting and ESA 95). Subsequently ELSTAT follows with its announcement for the general government sector with ESA 95 figures based on its questionnaire. This is why different figures, even for the same time frame, are published yet all of these are often labelled simply ‘primary balance’. With this in mind, it is not surprising that there is confusion about which is the correct figure.

Which is the primary balance that matters when it comes to the memorandum targets?

The definitive data for the primary balance is that which is calculated by ELSTAT for the general government sector and which is definitely the most reliable. For the period prior to the publication of the ELSTAT data, the equivalent Finance Ministry figures (calculated using the ESA 95 methodology) are also used in negotiations with Greece’s lenders.

Yet here is a final ‘but’. The targets of the current memorandum do not apply strictly to the primary balance of the general government sector. The specific balance used (according to the ‘programme definition’ click here for a short description, page 5) has certain modifications. It explicitly exempts public expenditure in the form of assistance to the banking sector, revenue from the profit transfers of the ANFA and SMP bond programs and revenue from sales and leases of state owned real estate assets. For 2012 and 2013 by far the most significant expenditure / revenue exempted was government spending on banks.

This is why there may be a ‘memorandum’ primary surplus while the true balance is a primary deficit due to the large state expenditure on the banks. That is exactly the situation that exists today.


What is the impact of state support of the banks?

The majority of the state recapitalisations of the banks via the Hellenic Financial Stability Fund (HFSF) began in mid 2012 and were completed in April 2013. Through these recapitalisations the Greek state obtained large majority stakes in four banks deemed viable, but this came with increased costs as the state adopted a more active role than that of guarantor of their debts (as was the case previously). For this reason we see for the first time during the period 2012-13 a negative amount showing up on the national accounts due to the support of the banks as opposed to the period 2009 -11 when revenue from the preferred shares and the accrued fees from the guarantees of interbank lending were higher than the accrued expenditures. 

Note: When the annual financial statement of the HFSF is published for 2013, it is certain that the height of state support will be revised downwards to take into account HFSF losses, as occurred in August 2013 which led to a significant revision of ELSTAT’s statistics for 2012. This in turn will provide the final picture for the true primary balance of 2013. Something which means that until then the figures A and B below for 2013 must be treated as temporary, even if they have been published by ELSTAT and the ministry. What follows is a summary of the relevant statistics for the past five years.

(A) General government primary balance (-) deficit / (+) surplus

2009: ‐€24.190 million    
2010: ‐€10.860 million
2011: ‐€4.981 million
2012: ‐€7.771 million
Jan. – Sep. 2013: -€17.026 million
Jan. – Dec. 2013: -€15.414 million (Finance Ministry figures)

(B) Effect of financial assistance of banks

2009: €373 million
2010: €960 million
2011: €622 million
2012: -€5.495 million to banks
Jan. – Sep. 2013: -€19.626 million
Jan. – Dec. 2013: -€19.314 million (Finance Ministry figures*)

(C)=(A)-(B) The ‘Memorandum” general government primary balance (-) deficit / (+) surplus

2009: -€24.563 million
2010: -€11.820 million
2011: -€5.603 million
2012: -€2.276 million
Jan. – Sep. 2013: €2.600 million
Jan. – Dec. 2013: €3.900 million (Finance Ministry figures)

Source: EL.STAT. [1] [2] | Min. Finance (in Greek) [3]

The calculation was done on the basis of the ministry’s announcement (link in Greek) that 2.1% of GDP for 2013  = €3.9 billion (C) which implies a 2013 GDP of €185.714 million. The announcement does not refer to a specific height of the primary deficit but only the 8.3% of GDP. Therefore A was calculated as -8.3% of 2013 GDP. The amount of financial assistance to the banks (B) was calculated as (A) – (C).

*May include €2,715 million in revenue from profit transfers from ANFA/SMP program (source: general state budget 2013) which if true would mean a greater level of spending on the banks. However it is not clear from the announcement.

Conclusion

For the reasons outlined above, until the final financial statement of the HFSF for 2013 is released in August, the situation appears quite fluid and it is difficult to make reliable predictions over the height of state financial assistance to the banks (which includes not only the amount of public spending but the value of the bank assets acquired). Given that this is a very significant part of the budget as calculated by the accrual method, only when this happens will there be a clearer picture of the actual primary surplus which will certainly be revised downwards.

On the other hand, the data that show that the ‘memorandum’ primary surplus is €3.9 billion appear reliable as they do not include the activities for the recapitalisation of the banks. Although it is expected that the ELSTAT calculated surplus released in April will differ from the ministry’s figures, it is almost certain that it will surpass the memorandum target of €0 for 2013.

This analysis was first published in Greek on SimonKnowz.com