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Indebted Portugal, Ireland, Greece, Spain and Italy were called as PIGS
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Can Europe Be Saved?
Time is running out to rescue the economies of Portugal, Ireland, Italy, Greece, and Spain.
The countries known collectively as the PIIGS—Portugal, Ireland, Italy, Greece, and Spain—are burdened with increasingly unsustainable levels of public and private debt. Portugal, Ireland, and Greece have seen their borrowing costs soar to record highs in recent weeks, even after their loss of market access led to bailouts financed by the European Union and the International Monetary Fund. Spanish borrowing costs are also rising.
Greece is clearly insolvent. Even with a draconian austerity package, totaling 10 percent of gross domestic product, its public debt would rise to 160 percent of GDP. Portugal, where growth has been stagnant for a decade, is experiencing a slow-motion fiscal train wreck that will lead to public-sector insolvency. In Ireland and Spain, transferring the banking system's huge losses to the government's balance sheet—on top of already-escalating public debt—will eventually lead to sovereign insolvency.
The official approach, Plan A, has been to pretend that these economies are suffering from a liquidity crunch, not a solvency problem. The hope is that bailout loans, with fiscal austerity and structural reforms, can restore debt sustainability and market access. But this "extend and pretend" or "lend and pray" approach is bound to fail, because most of the options that indebted countries have used in the past to extricate themselves from excessive debt are not feasible.
For example, the time-honored solution of printing money and escaping debt via inflation is unavailable to the PIIGS, because they are trapped in the eurozone straitjacket. The only institution that can crank up the printing press is the European Central Bank, and it will never resort to monetization of fiscal deficits.
Nor can we expect rapid GDP growth to save these countries. The PIIGS' debt burden is so high that robust economic performance is next to impossible. Moreover, whatever economic growth some of these countries might eventually register is contingent on enacting politically unpopular reforms that will work only in the long run—and at the cost of even more short-term pain.
To restore growth, these countries must also regain competitiveness by achieving a real depreciation of their currency, thus turning trade deficits into surpluses. But a rising euro, pushed higher by excessively early monetary tightening by the ECB, implies more real appreciation, further undermining competitiveness. The German solution to this conundrum—keeping wage growth below that of productivity, thereby reducing unit labor costs—took more than a decade to yield results. If the PIIGS started that process today, the benefits would be too long in coming to restore competitiveness and growth.
The last option—deflation of wages and prices to reduce costs, achieve a real depreciation, and restore competitiveness—is associated with ever-deepening recession. The real depreciation necessary to restore external balance would drive the real value of euro debts even higher, making them even more unsustainable.
Lowering private and public consumption in order to boost private savings, and implementing fiscal austerity to reduce private and public debts, aren't options, either. The private sector can spend less and save more, but this would entail an immediate cost known as Keynes' paradox of thrift: declining economic output and rising debt as a share of GDP. Recent studies by the IMF and others suggest that raising taxes, cutting subsidies, and reducing government spending—even inefficient spending—would stifle growth in the short term, exacerbating the underlying debt problem.
If the PIIGS can't inflate, grow, devalue, or save their way out of their problems, Plan A is either already failing or bound to fail. The only alternative is to shift quickly to Plan B: an orderly restructuring and reduction of the debts of these countries' governments, households, and banks.
This can happen in a number of ways. One can carry out an orderly rescheduling of the PIIGS' public debts without actually reducing the principal amount owed. This means extending the maturity dates of debts and reducing the interest rate on the new debt to levels much lower than currently unsustainable market rates. This solution limits the risk of contagion and the potential losses that financial institutions would bear if the value of debt principal were reduced.
Policymakers should also consider innovations used to help debt-burdened developing countries in the 1980s and 1990s. For example, bondholders could be encouraged to exchange existing bonds for GDP-linked bonds, which offer payouts pegged to future economic growth. In effect, these instruments turn creditors into shareholders in a country's economy, entitling them to a portion of its future profits while temporarily reducing its debt burden.
Reducing the face value of mortgages and providing the upside—in case home prices were to rise in the long run—to the creditor banks is another way to convert mortgage debt partly into shareholder equity. Bank bonds could also be reduced and converted into equity, which would both avert a government takeover of banks and prevent socialization of bank losses from causing a sovereign debt crisis.
Europe cannot afford to continue throwing money at the problem and praying that growth and time will bring salvation. No one will descend from the heavens, deus ex machina, to bail out the IMF or the EU. The creditors and bondholders who lent the money in the first place must carry their share of the burden—for the sake of the PIIGS, the EU, and their own bottom lines.
This article comes from Project Syndicate.
urope's PIGS: Country by country
BBC News
Thursday, 11 February 2010
http://news.bbc.co.uk/1/hi/8510603.stm
PIGS is a horrible acronym.
But this is how the financial markets refer to the troubled and heavily-indebted countries of Europe - Portugal, Ireland, Greece and Spain.
(Some analysts use PIIGS to include Italy - Europe's longstanding biggest debtor.)
Greece has dominated the concerns of investors since late last year, when concerns over whether it will be able to pay off the 300bn euros ($419bn; £259bn) in government debt it currently owes.
The euro has been battered over the past month as some even started to fear the break-up of the eurozone.
Now the European Union has agreed a deal to rescue Greece - with perhaps other wrecked economies to be helped at a later date.
Just how bad a situation are the PIGS in, and how does that compare with the UK?
GREECE
Economy, in European Union: 11th largest
Latest GDP figure: -0.3% (Third quarter of 2009)
Gross debt in 2010, forecast: 125% of GDP
Gross debt in 2007: 94.5% of GDP
Jobless rate: 9.7%
Population: 11,260,402
Stocks performance in 2010: -10.5% (to 11 February)
Greece benefited from joining the euro in 2001. But the Greek government went on something of a spending spree and public spending soared.
Now, it is suffering from its huge spending - and widespread tax evasion - as it finds itself unable to cope with its huge debt loads and meet EU deficit rules. Greece's deficit is, at 12.7%, more than four times higher than European rules allow.
It remains to be seen whether the EU's deal on Greece will help soothe markets, and ease concerns over other indebted nations.
IRELAND
Economy, in European Union: 13th largest
Latest GDP figure: 0.3% (Third quarter of 2009)
Gross debt in 2010, forecast: 82.9% of GDP
Gross debt in 2007: 25.4% of GDP
Jobless rate: 13.3%
Population: 4,450,014
Stocks performance in 2010: -1.5% (to 11 February)
The Irish Republic was one of the biggest success stories of the recent boom, with its economy nicknamed the "Celtic Tiger". But its economic growth was dependent on a property bubble.
It became the first eurozone country to fall into recession in 2008. It has pumped 7bn euros into its two biggest banks, Allied Irish Banks and Bank of Ireland, and created a state-run agency to handle their bad debt.
The Irish economy emerged from recession last year, but there was widespread public anger at the level of public spending cuts that have been made.
SPAIN
Economy, in European Union: Fifth-largest
Latest GDP figure: -0.1% (Fourth quarter of 2009)
Gross debt in 2010, forecast: 66.3% of GDP
Gross debt in 2007: 36.2% of GDP
Jobless rate: 19.5%
Population: 45,828,172
Stocks performance in 2010: -13% (to 11 February)
Spain has been very hard-hit by huge declines in its property markets. With recent figures showing its economy contracted in the last three months of 2009, Spain remains the last major economy in Europe still in recession.
While its banks have withstood the economic downturn better than in the Irish Republic or the UK, the government announced a 50bn-euro austerity package, including a civil service hiring freeze, at the end of January.
With the International Monetary Fund expecting Spain to contract by 0.6% in 2010 - compared with predicted growth for the 16-nation eurozone - many investors feel it will be the next country to rattle financial markets.
PORTUGAL
Economy, in European Union: 15th largest
Latest GDP figure: 0.9% (Third quarter of 2009)
Gross debt in 2010, forecast: 84.6% of GDP
Gross debt in 2007: 63.6% of GDP
Jobless rate: 10.4%
Population: 10,627,250
Stocks performance in 2010: -9.7% (to 11 February)
Portugal - with its high borrowing and sudden reversal in economic fortunes - has been lumped in the same category as its Mediterranean neighbours.
The country has vowed not to leave the eurozone, with its finance minister telling the BBC that it faced "an extraordinary and exceptional situation, due to a major financial and economic crisis without precedent in our recent history".
UNITED KINGDOM
Economy, in European Union: Third-largest
Latest GDP figure: 0.1% (Fourth quarter of 2009)
Gross debt in 2010, forecast: 80.3% of GDP
Gross debt in 2007: 43.8% of GDP
Jobless rate: 7.8%
Population: 61,634,599
Stocks performance in 2010: -4.2% (to 11 February)
Although the UK did officially come out of recession in the fourth quarter of 2009 - ending six consecutive quarters of economic decline - the growth was just 0.1%, much less than expected.
The UK government spent £85.5bn last year on bailing out the banks. Now, Chancellor Alistair Darling is predicting a record £178bn of borrowing in the current fiscal year.
With an election this year, Labour and the Conservatives have been sparring over the exact size of spending cuts and many economists have raised concerns that the UK could have its credit rating cut.
An Introduction To The PIIGS
PIIGS is an acronym, similar to others like BRICS and EAGLES, that defines a certain group of countries that have some commonality in location and economic environments. In this case, PIGS includes Portugal, Italy, Greece and Spain. While not originally included in the group, Ireland has found its way into the mix, which is why the term PIIGS is more commonly used now.
TUTORIALS: Macroeconomics
All of these countries are part of the eurozone and have been grouped together with the unflattering acronym of a barnyard animal known for its proclivity to mud, dirt and not-so- pleasant smells. The term itself is not an official title, nor does it separately delineate these countries from the European Union (EU). The term became a convenient way for currency traders and global investors to group these countries together. It has lived on as a club, of sorts, that no country would want to join and each participant would like to quit.
While primarily concerned with resolving their economic struggles, the members of the PIIGS resent the negative connotations and some have renounced the use of the term altogether. Though each member has become a staple of the media's attention, many professional organizations have made efforts to reduce or eliminate the term itself due to its negative connotations. Their efforts are commendable; however, there is no mistaking that these countries have a history of facing economic difficulties, high unemployment and political instability. While some of their individual GDP growth rates are surprisingly impressive, most of it was financed, leaving these countries with heavy debt burdens. Consider the following information about each component of the PIIGS.
Portugal
Located on the tip of Spain in Southern Europe, this country ranks as the 14th largest economy in the European Union. Hosting over 10 million people, Portugal exports over 75% of its agriculture-based products, including grain, cattle, cork wheat and olive oil. While it's one of the smallest economies included in the original PIGS, Portugal's economic woes include the same issues of slow economic growth, high unemployment and a high debt to GDP rating that affect its Mediterranean cousins.
Italy
The boot-shaped county in the south of Europe has had the misfortune of being included in this group, and is sometimes interchangeable with Ireland, depending on who is using the term. Because of Italy's rich history, famous food and romantic nature, it is one of the most visited countries in the world. About two-thirds of the 60 million residents work in the service sector, which may explain part of its high unemployment. Tourism, a driving force in this country, has been negatively affected since the world economy stumbled in 2008. Italy's economy is considered above average in development, driven by an educated, efficient, hard working labor force. Italy boasts a very high standard of living, but it has financed these standards by being one of Europe's biggest offenders of taking on debt. The country has reached an above average GDP per capita, with a national debt in excess of 100% of GDP.
Ireland
Also called the Emerald Isle, Ireland is a famous tourist destination due to its rich history, unique climate and terrain. Ireland has a population of around 4.5 million, and a small economy, which places it close to Portugal in its ranking in the European Union. Ireland was dubbed the Celtic Tiger, as it was once considered an economic anchor with Asian-like growth characteristics. Ireland participated in the economic boom throughout the 1990s and 2000s, but suffered from the same symptoms that affected many other countries, such as a housing bubble. Ireland fell as fast as it grew, and was the first eurozone country to fall rapidly into recession in 2008. In order to avoid collapse, Ireland required massive injections to its banks and significant government oversight and rebuilding efforts. While it emerged from the recession with the rest of the world, the scars are deep, leaving the country with heavy debt and very high unemployment. (For more, read The Story Behind The Irish Meltdown.)
Greece
The southernmost member of the EU hosts nearly 20 million tourists a year, which is almost twice the size of its actual population. Due to its rich history, romantic stories and famous beaches, it is no wonder this is a favorite destination for travelers. Greece joined the EU in 2001, and its government began building a mountain of debt that surpassed its GDP prior to the other EU countries. Greece also suffers from slow economic growth and high unemployment, but it differs in its economic structure compared to other European nations; Greece has a very large public sector workforce accounting for about half its GDP. This in itself has limited Greece, to a certain extent, in its economic recovery, as the public sector is notorious for moving and reacting slowly. Since the end of 2009 and up to 2011, Greece has been the most public, and most troubled, member of the PIIGS, seeing its fair share of corruption and political unrest.
Spain
Spain is the fifth largest economy in the EU, and, despite its place in the PIIGS, it's the 12th largest in the world as of 2010. Famous for its historical sites and diverse climates and locations, Spain also relies heavily on tourism to drive its economy. With over 45 million residents and a large land mass, Spain is an important part of the EU, but it has seen some of the worst economic damage. Part of the reason Spain was placed in this group was its dramatic economic downfall that started in the late 2000s. Spain boasted 15 years of above average GDP growth and began to stumble in 2007 as a result of a similar property bubble that occurred in Ireland, high unemployment and a large trade deficit. With such a successful run in growth and comparatively strong banking system, it was hard to imagine Spain falling so hard and staying down so long; however, prolonged growth without assessing fundamental issues such as debt management and employment, brought this country onto the brink of crisis.
Unemployment and Debt
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| Source: European Commission Q2 2011 |
While the origin of the term PIIGS grew from the currency trading and investment community, it caught on with the public. The members are quite vocal against the use of the term, finding it to have negative connotations that do not exactly inspire confidence.
As much as the members of PIIGS criticize the term, this acronym has just become too well used and convenient and will most likely stick with them for some time. While it seems the entire EU and the rest of the world is suffering from some of these same symptoms, these five countries seem to always be on the top of the list when it comes to high debt levels compared to GDP, stagnate economic growth, unstable and sometimes corrupt governments, high unemployment and a general lack of catalysts for change, besides government or EU intervention. Each of these countries has had some previous experience with growth and economic success, but since joining the highly touted EU, they have used their collective borrowing strength to promote growth using debt instead of organically expanding their economies.
The Bottom Line
While it is hard to imagine and impossible to turn back time, it's a wonder how the PIIGS might have fared had they gone it alone or left their currency floating and let the markets decide their fate. Unfortunately for these countries, the damage, whether caused collectively or independently, is deep and has left long lasting scars. The debt they collected to grow their economies has reached a point where it will most likely be excused, restructured or somehow revised in order for them to move forward. While the media tends to dramatize the issues of each of the PIIGS, their state of affairs could be much worse.
All of these countries have had both good times and bad, and will eventually right themselves, as are cycles that change. There is hope for the PIIGS and they may one day be on top of the economic world. (For more, read
