PIGS - the acronym that might fry your portfolio | Article

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Filed under: Capitalism, Economy, Europe, Stock Market

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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8 comments

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- AdamC says:
  
  09:34am | 09/02/10
  
  Isn’t this the natural second phase of a slowdown treated with lashings of Keynesian stimulus? With all the economists urging everyone to go into deficit, issue government bonds and splash cash (on school halls, perhaps) with reckless abandon, can you blame the Portuguese, Irish (I don’t think it was Italy), Greeks and Spanish for doing just that?
  
  I say you can. Just because ‘liberal’ economists like Joseph Stiglitz have a Nobel prize doesn’t mean you should always listen to him. Even when you are under the umbrella of a reserve currency and think you can act like Barack Obama.
  
  Reply
- Shane From Melbourne says:
  
  10:39am | 09/02/10
  
  Apart from the moral hazard of bailouts, there is something to be said for taking the medicine all at once. The U.S still has its toxic assets, Japan is still in the doldrums, nobody knows quite what is going on the Chinese banking sector, Fortress Europa is having internal problems, Africa is the usual mess and the middle east is finding out that sandy real estate is not quite a good bargain after all.
  Not a lot of love for Wall St in Main St, USA or at Davos tonight.
  
  Reply
- thatmosis says:
  
  11:24am | 09/02/10
  
  Anybody with half a brain who thought that we had survived the crisis had rocks in their collective heads. Im no economist but even I know that if you spend billions bailing out banks and firms that caused the problem then rested on your laurels thinking they would change their ways and bring sanity back to the way they operated had rocks in their heads. We are headed back into the crisis and this time their will be no money to bail these people out. Hold onto your hats as its going to be a bumpy ride.
  
  Reply
- Simon says:
  
  01:28pm | 09/02/10
  
  Well the unsustainable welfare entitelments combined with a collapsing birth rates were bound to result in this situation.
  
  The amazing thing to me is that Obama, seeing where it leads, seems to be determined to take the US down the same road.
  
  Rudd claims that our current deficit at 5% of GDP is healthy by world standards. Well he’s right in the comparative sense - but that’s only because the PIGS (or PIIGGS to include Ireland and GB) are terminal.
  
  Nevermind, they’ll keep palying to the Glee Books crowd with our equivalent of Obama’s “hope and change” pabulum until the problem is so obvious that not even they can ignore it.
  
  It was on election night 2007 when Maxine McKew made her “no one is blind in heaven” victory speech that it hit me: we’re f**ked!
  
  Reply
- N says:
  
  01:51pm | 09/02/10
  
  Clive; thought you might like to know that the US National Debt is actually sitting around the $12.5 Trillion mark at this junction. They have a budget deficit of around the $1.5 Trillion mark, which is just a ‘small’ part of the whole pie. US GDP to deficit is set to hit 100% by 2013, pretty scary stuff. Frankly I’m waiting for the states to implode spectacularly or at least be a puppet to China and Japan who collectively own 43% of US debt. I’d say your acronym of PIGS should be USPIGS?
  
  Reply
- AdamC says:
  
  02:21pm | 09/02/10
  
  @N and Simon, I agree. The US needs to reign in its entitlement spending, the associated structural, growing deficit and ballooning sovereign debt. The US may find itself in the same cesspit as the PIGS if it doesn’t.
  
  But Obama and US law-makers are happy to live in a fool’s paradise, with pointless extravagances like ObamaCare taking priority over actually fixing the problem.
  
  Reply
- Andrew says:
  
  06:26pm | 09/02/10
  
  Wikipedia quote from ‘Economy of Greece’: “The country suffers from high levels of political and economic corruption and low global competitiveness relative to its EU partners. Greek economy as of 2010 is almost bankrupt, over $420 billion in red, GDP.”
  
  Reply
- Clive says:
  
  07:34pm | 09/02/10
  
  Thanks, one and all, for your comments. You’re right, maybe it’s unfair to pick on the PIGS when the budgets of most of the western world, particularly the US, are in a similarly parlous state. And yes, it probably was inevitable that the second wave of the crisis would be triggered by the sad (and belated) realisation that all the debt-funded, budget-busting stimulus spending of the past 18 months would come back to haunt us. It is sobering stuff. I wish I knew how it was going to play out but, like most economic forecasters, I’d only be guessing. Cheers, Clive
  
  Reply