There’s quite a menagerie in the stock market petting zoo. You’ve got your bulls, your bears and the occasional stag. Until now, though, you’ve never had PIGS.
In the past week, the PIGS have run rampant, trampling markets and joining CDO and CDS as acronyms guaranteed to strike fear into the hearts of investors. Like collateralised debt obligations and credit default swaps – those complex financial instruments that fuelled the GFC – anyone with shares needs to keep an eye on the PIGS.
Portugal, Italy, Greece and Spain – collectively, and unkindly, derided as the PIGS – are in a fair degree of financial pain. All of them have budget deficits of more than 10 per cent of GDP, which experts reckon they will struggle to finance on wary international bond markets.
The problems started with Greece, the ugliest of the PIGS with its government deficit of 12.7 per cent this year the highest of the bloc of nations that use the euro. Talk that Greece would default on its hundreds of billions of euros of debt – a scenario still considered unlikely by most – drew the attention of the world’s financial markets. And it didn’t take long for investors to realise the sovereign-debt issues were not confined to the eastern end of the Mediterranean, with Portugal, Italy and particularly Spain also facing doubts they can rein in their over-blown budgets.
Some economists are asking whether the debt contagion will spread to Ireland (an occasional member of the PIGS if you cut Italy a break), Britain (whose deficit will hit 11.2 per cent of GDP this year) and, ultimately, the rest of the world. The US has a $US1.6 trillion deficit, after all.
Nobody’s really sure if we are facing another wave of the debt crisis, where defaults in one riskier corner of the market, say sub-prime mortgages in the US, affect the cost of raising funds around the world, inflicting damage on all markets. But the fear of a crisis breaking out in the government debt market, which just about every developed country in the world has tapped to dig its way of the GFC, is a worry.
At best, the problems in Greece and its porcine partners will be confined to Europe. Germany, as the leading member of the European Union, or even the IMF, would be likely to step in before Greece defaulted. But even that would mean a rise in borrowing costs in Europe, slowing the continent’s recovery from the crisis and denting the confidence of markets around the world.
Financial markets have been increasingly skittish in the past month. Everybody knew the 50 per cent-plus run in global stocks since the depths of the crisis last March was unsustainable. The consensus was that the markets had run ahead of the actual recovery. The inevitable correction was coming, and it appeared investors were looking for an excuse – any excuse, any sign we hadn’t seen the back of the crisis – to bring it on.
Dubai came to the party in mid-December, with its threatened debt default setting of a wave of anguish before Abu Dhabi bailed it out. Beijing was next, slamming the brakes on bank lending in mid-January in an effort to stop its economy over-heating. That coincided with Barack Obama’s plan to rein in the banks. Markets swooned. Last week, it was Athens’ turn.
The effect on the markets was pretty standard – a flight away from riskier assets (starting with European stocks, then most global stocks, then commodities and the Australian dollar) towards safe havens (US bonds, strange as that may sound given America’s debt issues, and the US dollar).
And that’s the way it will play out if the PIGS start dropping.
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