FORTUNE –For the past few years, we've heard little
but bad economic news from Greece. This week, though, something unexpected has
developed: The financially-strapped nation in the middle of Europe's ongoing
debt crisis has reported a budget surplus during the first seven months of this
year following months of deep cuts to government spending. If this continues,
it could post its first budget surplus in more than a decade for 2013.
The surplus reached 2.6 billion euros (or $3.5
billion), compared with a deficit of 3.1 billion euros a year earlier, the
Greek Finance Ministry reported.
If it sounds too good to be true, it very well might
be. Here are three reasons why:
It leaves a lot out:
Although spending cuts have helped create a budget
surplus for Greece, there's really no extra cash in the government's coffers.
Officials have reported what's called a 'primary surplus,' which does not count
what the financially troubled nation pays in interest for its monstrous debt.
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Greece pays a discounted rate of interest as part of
its bailout package, but even then the payments are still substantial because
of the scale of its debt. It currently stands at 157% of GDP and is expected to
rise to 171% by the end of this year, says David Beim, finance professor at
Columbia University.
"The overall point is the Greek debt situation is
completely unsustainable," says Beim, adding that a quicker way for Greece
to return to prosperity is for the country follow in the paths of Brazil and
Mexico in the 1980s when the countries defaulted on their debts.
It has deepened the recession
Greece's government might be spending much less, but
it comes at huge costs to the economy, which has been shrinking for the past
six years. During the second quarter, GDP contracted by 4.6% and many doubt
whether the economy will be able to return to growth in 2014.
To be sure, a primary surplus would be a major -- if
somewhat technical -- milestone for any country trying to prove it can manage
its debt, says Jacob Kirkegaard, a senior fellow with the Peterson Institute
for International Economics. It signals the country won't have to take on new
debt to pay for the old one; if the primary surplus rises substantially higher,
the debt to GDP ratio would fall substantially.
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Greece isn't out of its slump, but Kirkegaard thinks
Greece's surplus is nonetheless a "sign that the fiscal stabilization in
Greece has almost been reached. In that sense this is good news for
Athens," he writes in an email.
That, however, depends how quickly the economy might
grow months from now. For Greece, where the jobless rate reach a record 27.6%
in May, the chances of a return to economic prosperity look pretty far away.
It delays the inevitable
If Greece's budget isn't as strong as the government
may have us believe, why even say anything at all?
One reason is that the debt-troubled nation is looking
to bolster its case for more debt relief from international creditors, as
Eurozone officials have promised to help Greece with its debt if it promises to
tighten its budgets and restructure its broken economy. Germany, however, has
rejected the additional help.
If Greece's budget surplus rises further, that could
very well build a bigger case for a default. Some experts say it would be the
best time to do so, since Greece would be getting rid of its debt at time when
it has the economic cushion of a budget surplus.
But as Greece looks for more debt relief, officials
are using the surplus to do anything but default.
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