First we had countries which fell under the acronym "BRIC" - Brazil, Russia, India and China. These countries were believed to be the emerging world powerhouses. Now, we have a new one: "PIGS", or Portugal, Italy, Greece and Spain. In the case of PIGS, the acronym is not in the least flattering. Rather, it refers to a group of countries in such financial trouble that their sovereign debt is threatening to pull down the European Union (EU) and possibly the global economy altogether!
The sign that major stresses can be felt is being witnessed in both the bond markets and the countries'
"Credit Default Swaps" (CDS), which price the "insurance" against default. Recently, Spain's and Italy's bonds have carried a CDS of 1.65%, Italy's have risen above 1.5%, while Greece's have expanded to a frightening 4%. To put things in perspective, the United States, no longer considered a great credit, has an active CDS market priced at less than 0.5%! Ireland, not officially a PIGS country, but guilty by association, has its CDS in the 1.5% range.
About six weeks ago, I wrote a piece on Soverien Debt (http://markostake.blogspot.com/2009/12/investing-in-soverign-debt-much-riskier.html. Reading this might provide some excellent background for anyone unfamiliar with the issues.
According to a recent article in the Wall St. Journal, the global economic downturn and extensive government spending to fight it, have led to major fiscal problems in Europe, especially for less-dynamic economies like Greece, Portugal, Ireland and Spain. Such countries took advantage of their membership in the 16-nation euro-bloc during the boom by borrowing at unusually low interest rates. But now, investors are worried about how they will reduce yawning budget deficits that exceed 12% of their economic output in the case of Greece and Ireland.
European policy makers are trying to pressure countries like Greece into taking stronger action to fix their finances.
The potential damage from any sovereign default in the EU will affect the entire region which shares a currency but NOT fiscal policies. Now there is talk that Greece is looking to be "bailed out". Wonder where I've heard the words "bailed" and "out" before?
The sovereign debt isssue is another reason that 2010 is shaping up to be one nasty year!
Questions? Disagree? Agree? TAKE ME ON!