Tuesday, February 9, 2010

Sovereign Debt Crisis Threatens To Take Down World Economy

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!

Marko's Take


  1. Wow how interesting! I am slowly but surely learning from your blog. PIGS... wow. Just wow.

  2. The bankers will do what is needed to keep this ride going. World is not going to fall apart over this. It might be "sold" as the reason, but only the man behind the curtain really knows. Good read, thanks

  3. Greece has always had major problems. It's biggest problem being it's run by Greeks. I aught to know. Some things just can't be overcome.

  4. Mango:

    Always a pleasure! This blog is exactly for learning things that most people don't know but ought to know...


    I couldn't agree with you more...just another straw so to speak...Thanks!


    Perhaps a case of Grecian formula?


  5. Marko--very good article, the only thing I can say is BUY GOLD-enough said

  6. rdis:

    Thanks so much! yes, the time to buy is nigh!

    very appreciated....stay tuned. we go on You Tube very soon!



Take me on!