Update: The PIIGS Get Slaughtered
The decision to finally bail out Greece is making a big impact on the markets this week, but the fallout is still far from over. Here’s everything you need to know about the PIIGS debt crisis right now…
Everyone has been quietly terrified that the Greek contagion would spread from one PIIGS (Portugal, Italy, Ireland, Greece and Spain) to another. Now it’s clear the real “swine flu” is just beginning.
Last week, S&P announced a cut to Portugal’s sovereign credit rating from A+ to A-, down two notches.
But the cut of Portugal wasn’t enough. That slipped across my wire about 11:00 a.m. (EST) on Tuesday. At 11:30 a.m., European Central Bank (ECB) President J.C. Trichet, announced that a default of Greece was “out of the question,” even though he refused to comment on the current negotiations.
It seems he may have just been whistling in the graveyard. Just 15 minutes later, everyone’s greatest fears came true: S&P announced that they had cut Greece’s bond rating to “junk” (BBB+).
And following that, Spain saw its credit rating slashed, too.
What on Earth will happen next?
Bloomberg reports that Greece’s two-year bond soared to 17% after its rate cut announcement. This is why Germany was calling for more austerity cuts to the Greek budget before they signed on to any bailout agreement.
But it looks like that may all be history thanks to a $145 billion bailout agreement made between European governments and the International Monetary Fund to bail Greece out of its mess. The bailout may have quelled some concerns about the fate of the collective Eurozone economy, but its effects have been muted by the prospects of what’s potentially still to come across the pond.
I have made the case here before and will again re-state it: There is not enough money to bail out all the struggling nations of Europe. Take a gander at these GDP figures (in 2009 U.S. dollars) and its ratio of public debt-to-GDP:
Now compare the same table with external debt (in 2009 U.S. dollars):
I’ll leave you to your own devices to calculate what the percentage to GDP the external debt is. And just for the record, the difference between the two kinds of debt is that public debt is essentially what the government owes. External debt is basically all debt combined. That’s the easiest way to remember it.
And now here we are with three of the infamous PIIGS getting a poorly timed rate cut. How can a government with such a debt load ever hope to crawl out from underneath it? It would be hard even if the country could borrow money at a 0% interest… let alone at 17%!
The handwriting is on the wall.
I was pretty sure that when the news broke last week about the downgrades, that we would close the NY session with the euro below 1.32. Sure enough, we did.
It is hard to say what exactly will happen going forward. Government structures stay in place for a long time, even after the heart of the beast is already eaten out with cancer. This is why the United States is still on its feet. We become accustomed to certain fixtures remaining in place.
Other countries have defaulted on their loans and are still here. In the highly developed West, that is almost a given. In other places, such as a number we could name on the African continent, not only can whole governments change hands, but countries will change names and governing structures altogether.
So while the Union may not dissolve, and may not change its name, its governmental structures have already been altered. Had the Maastricht treaty that created the Union been held in strictest of understandings and interpretations, no country would ever come close to a default. But then again, the countries with fringe economies had their financial standing and accountability issues papered over in the first place.
Otherwise, they would likely never have been let into the clique.
As you might expect, I’ll be watching how the situation unfolds very carefully… I’ll keep you updated.
May 4, 2010
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