Which Primary Surpluses are needed for EU Members?

The primary surplus is the difference between a country’s government revenues and expenditures, exclusive of interest. Debt is reduced if the relative primary surplus is higher than debt multiplied by interest minus GDP growth.

Posted thanks to David Bencek, Henning Klodt, Kiel Institute of Economics, Link to this Site for newest updates


The Kiel Institute Barometer of Public Debt


The current Kiel Institute Barometer of Public Debt shows a lacking sustainability of public debt across countries in Southern Europe. Even though secondary market yields on Spanish ten year government bonds are at their lowest since November 2010, the lasting recession, high unemployment and a growing deficit are putting a strain on Spain’s debt sustainability. But our simulation also shows that Spain could simply outgrow its debt crisis. Hungary’s situation is quite similar. However, due to a higher risk premium in comparison to Euro countries economic growth would have a weaker positive effect.

Italy’s new government is facing some difficult tasks. Their critical sustainability of public debt is mostly due to the traditionally high level of debt. Targeted measures to promote growth and reduce public debt in the medium term are required.

An assessment of the current situation in Cyprus is limited due to lacking data. Since September 2011, the long-term interest rate on government bonds, as recorded by the ECB, has been constant at 7 percent — which is the primary market rate of Cyprus’ last tender.1 Cyprus has only used short-term T-bills as a financing device since then, which suggests that the country has lost complete access to capital markets. Secondary market interest rates would therefore certainly be higher than 7 percent, making public debt at least in our low-growth scenario unsustainable. Furthermore, the effects of the rescue package on the level of debt has not yet been accounted for.

Portugal and Greece are the only EU countries whose necessary primary surplus ratio is above the critical threshold of 5 percent, which is underlying our assessment. Portugal, however, can reach a sustainable level by increasing long term growth. Greece, on the other hand, seems to be overly indebted and unable to reach a sustainable path on its own. Another haircut is likely to be expected.

How Does the Debt Barometer Work?

The debt barometer uses the primary surplus concept to determine the sustainability of a country’s revenue and expenditure policies. The basic idea involved is that we do not know what the maximum limit to a particular country’s debt ratio is, but we do know that its debt ratio cannot rise infinitely because at some point the country would go bankrupt.

The primary surplus is the difference between a country’s government revenues and expenditures, exclusive of interest. The ratio of the primary surplus to GDP (the primary surplus ratio PSR) must be equal to or greater than the debt ratio (S) times the difference between the nominal interest rate (i) and the nominal growth rate (g) if the debt ratio is to remain stable.

PSR ≥ (ig)/(1 + g) S.

The primary surplus is useful in determining the limits of a country’s debt only if it is coupled with criteria of how high the primary surplus ratio can go and how large the gap between the necessary primary surplus and the feasible primary surplus can become before the country will no longer be able to deal with its debt.

Our empirical assessment of historical developments in numerous countries leads to the conclusion that it is extremely difficult for a country to prevent its debt from increasing infinitely when the necessary primary surplus ratio reaches a critical level of more than 5%. When this level is exceeded for some time, it is almost impossible for a country to service its debt without receiving outside help (see Wirtschaftsdienst (Issue 9/2011)).

Since the ability of a country to service its debt is heavily dependent on its economic growth outlook and since predicting growth is fraught with uncertainties, the debt barometer incorporates two scenarios: a pessimistic scenario and an optimistic scenario. The former is based on a nominal GDP growth rate of 2%, the latter on a nominal GDP growth rate of 4%. These rates are long-term rates (not the rates during short-lived ups and downs in the business cycle) and would thus tend to be positive even in countries that have been hard hit by the financial and economic crisis. With respect to interest rates, both scenarios rely on information provided by the ECB on secondary market interest rates for ten-year government bonds.

 Primary Surpluses April 2014 Update

Once again a massive Greek improvement thanks to falling bond yields and deflation.

Greek Primary Surplus based on 2% GDP growth
April 2014: 8.39%
October 2013: 12.02%
April 2013: 17.42%
November 2012: 26.07%

Country Necessary Primary Surplus (2% Growth) Necessary Primary Surplus (4% Growth)
Austria -0.1% -1.62%
Belgium 0.25% -1.67%
Bulgaria 0.33% -0.1%
Croatia 1.6% 0.32%
Cyprus 4.77% 2.34%
Czech Republic 0.1% -0.85%
Denmark -0.17% -1.05%
Finland -0.05% -1.21%
France 0.14% -1.7%
Germany -0.36% -1.78%
Greece 8.39% 4.87%
Hungary 2.97% 1.39%
Ireland 1.27% -1.13%
Italy 1.85% -0.78%
Latvia 0.28% -0.36%
Lithuania 0.51% -0.25%
Luxembourg -0.05% -0.51%
Malta 0.73% -0.68%
Netherlands -0.14% -1.58%
Poland 1.09% 0.12%
Portugal 3.02% 0.52%
Romania 1.29% 0.5%
Slovak Republic 0.27% -0.86%
Slovenia 1.36% -0.11%
Spain 1.27% -0.66%
Sweden 0.07% -0.73%
United Kingdom 0.31% -1.46%

October 2013 Update

Greece has reduced the primary surplus ratio from 26% to 12% thanks to

Table 1: Necessary Primary Surplus Ratios of EU countries in October 2013
Country Necessary Primary Surplus (2% Growth) Necessary Primary Surplus (4% Growth)
Austria 0.14% -1.3%
Belgium 0.56% -1.37%
Bulgaria 0.27% -0.05%
Croatia 1.67% 0.54%
Cyprus 3.63% 1.78%
Czech Republic 0.15% -0.72%
Denmark -0.03% -0.95%
Finland 0.02% -1.02%
France 0.35% -1.43%
Germany -0.19% -1.76%
Greece 12.02% 8.29%
Hungary 2.61% 1.13%
Ireland 1.93% -0.4%
Italy 2.82% 0.31%
Latvia 0.71% -0.09%
Lithuania 0.8% 0%
Luxembourg -0.02% -0.49%
Malta 0.87% -0.51%
Netherlands 0.12% -1.23%
Poland 1.24% 0.15%
Portugal 5.25% 2.77%
Romania 1.09% 0.4%
Slovakia 0.53% -0.39%
Slovenia 2.52% 1.36%
Spain 2.11% 0.21%
Sweden 0.15% -0.54%
United Kingdom 0.24% -1.56%

Older data

Table 1: Necessary Primary Surplus Ratios of EU countries in April 2013
Country  Necessary Primary Surplus (2% Growth)  Necessary Primary Surplus (4% Growth)
Austria -0.27% -1.77%
Belgium 0.04% -1.95%
Bulgaria 0.24% -0.09%
Cyprus 4.63% 2.78%
Czech Republic -0.08% -0.98%
Denmark -0.28% -1.23%
Finland -0.26% -1.34%
France -0.18% -2.03%
Germany -0.65% -2.28%
Greece 17.42% 13.78%
Hungary 2.71% 1.23%
Ireland 2.12% -0.26%
Italy 2.91% 0.36%
Latvia 0.47% -0.34%
Lithuania 0.79% -0.02%
Luxembourg -0.14% -0.64%
Malta 0.97% -0.45%
Netherlands -0.24% -1.64%
Poland 0.83% -0.28%
Portugal 5.14% 2.66%
Romania 1.19% 0.5%
Slovakia 0.48% -0.47%
Slovenia 2.26% 1.11%
Spain 2.51% 0.57%
Sweden -0.12% -0.84%
United Kingdom -0.5% -2.37%

Table 1: Primary Surpluses Needed in Particular Countries (as of October 2012)

Nominal Growth Rate  2%  4%
Belgium  0.44% -1.54%
Germany -0.44% -2.09%
Ireland  3.20%  0.89%
Greece  26.07%  22.80%
Spain  2.95%  1.33%
France  0.17% -1.66%
Italy  3.63%  1.17%
Luxembourg -0.08% -0.48%
Netherlands -0.16% -1.58%
Austria  0.02% -1.50%
Portugal  7.06%  4.77%
Slovenia  1.93%  0.90%
Slowak Republic  1.07%  0.10%
Finland -0.11% -1.12%
Czech Republik  0.10% -0.77%
Denmark -0.34% -1.29%
Hungary  3.94%  2.34%
Poland  1,44%  0.32%
Sweden -0.17% -0.93%
United Kingdom -0.41% -2.20%
Thanks to David Bencek, Henning Klodt, Kiel Institute of Economics, Link to Site for newest updates

George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
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    […] economic growth below 2%. To be able to begin to amortize the debt, the surplus would have to be at least 12%, therefore Greeks would have to collect 11 billion more in taxes (or possible combine it with […]

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