Thursday, May 13, 2010

PIGS Go To Slaughter

Now that the Greek bailout has been undertaken, the marketplace is turning its attention to other nations believed to be under economic or financial stress.  The term "PIGS" originally referred to the "fearful foursome" of Portugal, Ireland, Greece and Spain.  Italy has appeared to be on the verge of joining this uneviable assemblage of financial wreckage - creating the revised "PIIGS".

As has been written here in recent weeks, the so-called austerity program enacted by Greece is a farce.  It is hardly "austere" to force lazy government workers to actually work!  It is hardly austere to reduce the absurdly generous early retirement packages which allow some civil servants to retire as young as 45.  Where can I sign up for that deal?

The other PIGS are now enacting their own "austerity" measures in an attempt to be more pro-active before their nations hit the crisis fever that was triggered by the Greek financial meltdown.

José Sócrates, Portugal’s prime minister, is expected to announce tough new austerity measures today, including a “crisis tax” on companies and wages, to reduce the country’s massive budget deficit.

Portugal's new austerity package, which follows similar moves by Spain, Greece and Ireland, is being introduced under pressure from Lisbon’s European Union partners for sharp budget cuts in support of a €750 billion emergency plan to defend the Euro.

Angry trade union leaders immediately called for a “mobilisation” against what they called “harsh and unjust” measures, expected to include a 1 % increase in value added tax to 21%  and increases of up to 1.5 % in income tax.  Unions opposed to cuts?  Shocking!  (Sarcasm intentional)!

The increases are expected to include a 2.5 % increase in corporate tax to 27.5 %.   Politicians and public sector managers will also see their salaries cut by 5 %.

The new measures are designed to reduce the budget deficit by an additional €2.1 billion, from 9.4 % of Gross Domestic Product (GDP) in 2009 to 7 % this year and 2.8 % in 2013.  Portugal’s original deficit target for this year was 8.3 % of GDP.

José Luis Rodríguez Zapatero, Spain’s prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 % cut in civil service pay to accelerate cuts to the country’s budget deficit.

In what he called one of the hardest speeches of his life, Mr Zapatero told parliament how Spain planned to reduce its deficit by an extra 0.5 % of GDP this year and another 1 % of GDP in 2011, a total of €15 billion.

The new measures should help bring the deficit down from 11.2 % of GDP in 2009 to just over 6 % of GDP in 2011.

Surprisingly, trade unionists were outraged at what they said were harsh measures.  One regional leader of the small United Left political party called for “rebellion and a general strike”.  Shocking!  (Sarcasm intentional)!

Thus far, Ireland has surprised the market skeptics by pro-actively embarking on a draconian plan to tackle its debt, which includes large public sector pay cuts, and resolve the bad loan problems at its banks.

Pledging to cut public sector spending by 7.5 % of GDP this year alone has not spared Ireland  market pain.  Last week its bonds were trading at a spread of 3 % over German Bunds.  The moves have prevented the country from being deemed a full-blown basket case.

Italy, has been on the cusp of becoming the 5th member of this elite group.  However, a very well received bond sale indicates that Rome is not yet ready for inclusion.  Italy just sold €3 billion of 2015 notes at an average yield of just 2.57 %, which was 2 basis points lower than existing comparable debt. This demonstrates a substantial level of market confidence.

The problems in the Euro-Zone only BEGIN with Greece.  Bail-out or not, the key to success will be a return to economic growth for all the affected nations.  Greek unemployment is now more than 12% and is expected to rise to 14% over the next year or so.  Until the European Union economies start to show growth, the budget deficits will continue to widen and the threat of a massive round of sovereign debt defaults will be an ongoing issue.

Marko's Take

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  1. And now the news comes that France is musing about pulling out of the Euro. Clearly, events are quickening, precipitating a tipping point.

  2. DHH

    I think the EU is going to fall apart and that the EURO will soon lose its status as a major currency. This can only get much worse before it gets any better since, ostesibly, we are in a "recovery". What happens when the recovery fails?



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