Saturday, February 13, 2010

The Greek "tragedy" or farce in PIGS

PIGS in current economic jargon stands for Portugal, Italy, Greece and Spain. Why lump them together? Lots of debt.

So what's wrong with that? Well, if you owe enough money and if cannot pay the creditors, something has to give. As a footnote, many argue PIGS may sound good, but the acronym misses out Ireland. PIGS should really be PIIGS. OK, PIGS does sound better, so let's go with the convention.

Why is PIGS now a hot topic? The immediate answer is Greece. The larger issue is Debt in general, now especially in the West.

The case in point is the particularly odorous case of Greece the government of which has been lying to the world through creative accounting and selective reporting for some years (6 is the figure used) about the true sizes of its national deficits.

Right now EuroZone governments, mainly Germany and France, the two largest economies in Europe, are scrambling to find a solution to the Greek "problem".

The problem arose from essentially 2 sources, reducible to one.

1) EuroZone imposes strict quantitative limits on how much deficits (ergo national debt) a member country can run up.

If these limits are breached, the government in question must remedy the deficit situation. Ergo, cut, cut and more cuts to bring the deficits down to statutory limits. A grace period is given, but clearly specified.

2) Government spends more money than it should to placate social and economic demands (I want what "they" have and I want them NOW) and to "buy" off political opponents or to "solidify" domestic allies. In short, many folks outside the government want a free lunch. Irresponsible government officials gladly oblige. They don't have the leadership and the spine to say NO.

This second reason is now a Western phenomenon. The US is a prime example of that.

Ironically those Asian "third world" economies, themselves lectured at and battered by too much debt a while back had swallowed hard, tightened belts and now have by and large sterling national balance sheets. Thailand, Malaysia, not to mention Singapore, Hong Kong, Korea and of course China. All have abundant (some say too much) reserves, trade surpluses and high savings rate.

Greece, among others, has been living a good life on borrowed funds and the time to pay up has come.

What to do? Good question.

EU cannot really afford to let Greece get off the Euro as speculators are betting on. Recorded shorts on Euro has never been so high. Once Greece went, then like the Lehman Brothers case, the "signal" is that all weak Euro economices, the PIIGS, will have to leave the Euro. That means a total collapse of the European Union each going back to one's own national currency. IT would be a godsend to currency speculators.

I am sure the German Bundesbank and France are loath to bail out Greece, but what's the alternative? Switzerland is the second largest creditor to Greece.

I think these 3 countries will have to do what the Western countries have been doing for decades to African countries: just forgive the debt Greece owes. Or print more money to buy off the debt.

Who are the major creditors: See this chart

If you have 10 minutes the following 2 clips are worth your time: Stiglitz, Spanish official vs a sarcastic, no holds barred hedge fund manager on Greece.

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