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Of BRICs and PIGS

There is a significant amount of hand-wringing going on in the US that the Euro is fraying on the edges. Some pundits have even coined a rather derogatory acronym for Euro-countries in economic distress: the PIGS (Portugal, Italy or Ireland, Greece, Spain). The acronym bunches together four countries with very different backgrounds but one shared fact: they all face serious budget shortfalls.

The grouping of these countries, largely by investment banks, may simplify investment and policymaking decisions to an unfortunate level. Italy for one does not want to be part of the group, and the Italian bank UniCredit has waged an effective campaign to change the "I" in PIGS to Ireland. But Ireland too has begun to restore both consumer confidence and budget stability thanks to aggressive action by the central government. Commentators seem to keep the "I" because that is the crucial vowel that holds the acronym together.

Portugal, Spain, and Greece are also all facing very different challenges. Portugal has a sizable but manageable budget deficit, while Spain is struggling with a burst housing bubble a la Florida. Greece remains the real country of concern; but then again, Greece has roughly the same debt levels as Germany, so what is all the fuss about?

The classification overlooks the more important--and legally binding---organizations already in existence, namely the EU and the Eurozone. Talk of the dissolution of the Euro is premature but rampant: the New York Times has published no less than three articles on the subject in the last two days alone (here, here, and here). At the end of the day, policymakers in Europe and the US have to honestly ask themselves: is leaving the Euro really an option? The case of Iceland clearly demonstrates what happens to small countries with large debt obligations in tumultuous times and it is not pretty.

The discussion of categorization reminds me of the BRIC acronym held in high regard by investors prior to 2008. Brazil, Russia, India, and China were touted as the hallmarks of the developing world at the time, and investments in all four countries were seen to be equally appeasing. Two years, a war in Georgia, and a global economic crisis later, the BRICs no longer look so homogeneous. I suspect the same will soon be true for the PIGS. 

How should we classify countries economically? Is there any value in
grouping problem areas? Just as a reference, I did a quick look at state budgets in the US and found five states with budget deficits greater than 10% in 2009: Arizona, California, Nevada, New Jersey, Rhode Island. Do you think CARINN could catch?

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Marie Claude on :

http://mgiannini.blogspot.com/, http://bit.ly/aRFFDO GoldmanSachs helped Greek government to mask the true extend of its deficit http://tinyurl.com/yknvxwu Americans hedges funds were speculating on Greece, arguing they didn’t get enough revenues… Doesn't the Maastricht treaty forbid a financial solidarity in the eurozone ? the good aspect of this perversion, is that the dollar rate increase, good for the EU exportations Also Greece borrowed money outside the Eurozone, especially for the incriminated etablishments that are denying Greece credit at the moment, Golman Sachs Well, these mediterranean economies had an artificial groth rate, thanks to their accession to EU, they have lived above their means, I hope that we aren't paying for them again, enough is enough !

Marie Claude on :

"especially for the incriminated etablishments"--> especially from...

Pat Patterson on :

I have to admit that there might just be a touch of prejudice involved by naming those countries, whose troubles are from wildly different sources though deficits remain ongoing, and it wouldn't be the first time a group of newspapers and pundits took the easy way out and dealt with a stereotype. The only caution here is that while of the three or four countries named a big part of the problems reside in their public sector whereas Iceland managed to shoot itself in the foot and everybody nearby by a Ponzi scheme of paying higher interest rates then one could get in the Eurozone. But that was primarily from the private sector though abetted by the government because of the tax windfall such deposits were generating. Speaking as someone who has two Porsches, one running and the other not so much, I tried to go to Iceland to buy an abandoned GT2 for around $20K. That is 1/5th its normal retail. But the shipping made it all problematic. Eventually the banks were shipping all of these exotic cars to the US and Europe for free to simply get back some of the money it had loaned out for the original purchase.

Andrew Zvirzdin on :

Paul Krugman puts a little bit of perspective on the Greece financial plight today: http://krugman.blogs.nytimes.com/2010/02/08/euro-perspective/ And Calculated Risk quotes the Telegraph asking if Greece is playing a game of chicken. There are some other good article references here as well: http://www.calculatedriskblog.com/2010/02/greek-finance-minister-call-for-help.html

Marie Claude on :

The EU commission asked for bailing out Greece it's a waste of our taxes ! I am fed up with these civil EU servants using our money People who lives in a dream should be awaken ! otherwise that means the end of our western civilisation

Pat Patterson on :

Yet it was also announced today the ruling party of Greece, PASOK, sort of agreed to curb its instincts to spend. The problem is that they have asked for a three-year grace period without any penalties. I suspect, as the article below points out, that this is simply a stall until the rest of the Eurozone has made these continued budget adjustments and the Greece will benefit, without pain, from a once again expanding economy. http://www.dwelle.de/dw/article/0,,4817426,00.html

Joerg Wolf on :

Here is someone, who blames the US. Isn't that some awesome new thinking? "By allowing NY financial traders to viciously attack struggling EU members, the US is putting the transatlantic partnership in jeopardy The scenario employed against Greece, Portugal and Spain by New York-based international financial gamblers is all too familiar to anyone who recalls the events of the 1997-98 Asian financial crisis. Then, as now, hedge funds targeted a country whose GDP was largely dependent on tourist dollars - Thailand - and had fiscal problems at the time. The crisis afterwards engulfed the “sick south” of the continent - Indonesia, Malaysia, South Korea - and severely affected China, as well. The MO was slightly different, as hedge funds targeted these countries’ currencies, whose devaluation jeopardised their ability to repay the dollar-denominated loans, requiring the IMF’s massive intervention." [url]http://www.europesworld.org/NewEnglish/Home_old/CommunityPosts/tabid/809/PostID/1123/TheTransatlanticPartnershipinJeopardy.aspx[/url]

Pat Patterson on :

Well at least he didn't say that a cabal of Jewish Wall Street bankers were responsible but I would say that might have been the message. And his comparison between the Asian crisis, which was primarily the result of currency manipulation, and what is going on in Europe, mainly due to the recession, deficits and debts, are hardly the same thing.

Andrew Zvirzdin on :

Does this mark a new phase of economic competition between the US and EU? The currency fluctuations have been going on for some time, but what is developing in Europe may lead to something very different. I read an article yesterday in Slate where the author was crowing that the US is back on the top of the pile, largely because everyone else is more of a mess than we are: http://www.slate.com/id/2244424/

Joerg Wolf on :

Q Pat "Well at least he didn't say..." That's the spriti! Always look on the bright side of life... ;-)

Marie Claude on :

6janvier: Jürgen Stark allume la mèche http://www.lesechos.fr/info/inter/020359239386-les-30-jours-qui-ont-ebranle-l-euro.htm) someone talk too much and alerted the markets, no wonder Greecs aren't pleased with this representant of ECB

Pamela on :

Pat, I'm not sure it's NOT currency manipulation. I mean, why now? Greece has been a mess since Pericles. Hell, I would have shorted the euro AND the dollar in 2008. As for blaming the Americans - jeez, I should hope we're that smart.

Pat Patterson on :

Pericles did leave the Greek treasury with a surplus but the true mess in Greece occurred when the Roman maniples turned the Macedonian phalanx at the Battle of Cynoscephalae. From that point on the Greeks became a source of wealth for other countries but since independence still haven't quite grasped the filling the potholes and balancing the budget part of their fiscal duties. And I doubt PASOK has either the inclination or even a mandate to cut spending as they had promised to increase spending to maintain the current dole and to expand the economy. I can certainly agree that a Russian "bailout" of Greece might be a very big problem for the EU but much less for NATO as Greece was seen as increasingly unreliable and the US/NATO have been withdrawing assets from Greece and placing them in Bulgaria. The US has only one military facility, a USN repair base, in Greece on leased property that provides thousands of jobs to the locals who are very nervous that the Souda Bay installation could be closed at any time.

Pamela on :

What does this mean? ----------- Is Vladimir Putin About To Undermine The EU With A Big Greek Bailout? The Greek Prime Minister is set to visit Russia next week in the middle of the biggest crisis in the country's recent history. He will sit down to economic talks with his Russian counterpart Vladamir Putin and it has to be suspected that the debt crisis may be up for discussion. They'll also be discussing military and energy policy. Could the Greek PM be trying to strike a bargain with Putin to save his troubled country? If so, this seems like a monster blow to the EU, and posibly to NATO. http://www.businessinsider.com/greek-prime-minister-heads-to-russia-seeking-help-on-the-economy-2010-2

Andrew Zvirzdin on :

This sounds eerily familiar to Iceland's overtures to Russia a year ago. Seems the financially beleaguered know how to leverage the EU-Russia relationship. See http://www.bloomberg.com/apps/news?pid=20601087&sid=aV.chNI42D8o&refer=home Of course, in the end Iceland did not take any loan. They just used the possibility to leverage with the EU and UK.

Pat Patterson on :

The latest figures on the national debts of both Germany and Greece are hardly comparable. Greece's current debt is 108% of GDP while Germany's is "only" 77%. But between the two, even if the debt was identical, Germany is in a much stronger position as it actually taxes less and thus has more money available in the private sector while Greece doesn't have anywhere near that kind of fiscal flexibility. And Greece still has to pay off that mountain of debt from hosting the Olympic Games.

Marie Claude on :

I don't buy it, why would Russian bail a country that is as so corrupted as she is, greecs have the habit to not pays the goods at their right prices,because most are passed through traffics, plus they don't pay TVA, and this habit of cheating is there for such a long time that isn't worth to try to change them, wether Germany will leave the euro, Deutsches Bank was one which bought some significant part of the Greec loans, also Germany is still refractory to lowering the euro rating, which would be the solution) wether Greece will be outed of the eurozone

Pamela on :

And today we have this --------------------- Collapse of the euro is 'inevitable': Bailing out the Greek economy futile, says FRENCH banking chief In a note to investors, SocGen strategist Albert Edwards said: 'My own view is that there is little "help" that can be offered by the other eurozone nations other than temporary, confidence-giving "sticking plasters" before the ultimate denouement: the break-up of the eurozone.' He added: 'Any "help" given to Greece merely delays the inevitable break-up of the eurozone.' More at this link http://www.dailymail.co.uk/news/worldnews/article-1250433/Greece-debt-bailout-EU-leaders-split-euro-crisis.html I also reads in today's Financial Times: -------------- Greece turns on EU critics Greece on Friday unleashed a fierce attack on its European Union partners, accusing them of creating a “psychology of looming collapse” a day after they pledged support for the country’s crisis-hit government. George Papandreou, Greek prime minister, said that, in the eurozone’s first big test, Greece had become “a laboratory animal in the battle between Europe and the markets”. In a televised address to his cabinet, he criticised EU members for sending “mixed messages about our country . . . that have created a psychology of looming collapse which could be self-fulfilling”. Mr Papandreou blamed the European Commission for failing to crack down on the previous conservative government’s “criminal record” in falsifying statistics. “This has undermined the responsibility of the European institutions with international markets,” he said. http://www.ft.com/cms/s/0/3cfeab9e-1813-11df-91d2-00144feab49a.html?nclick_check=1 -------------- So a Greek administration lied and it's the EU's fault for not doing something about it? Neat trick, that.........

Pamela on :

Now THIS is interesting. Today's NYT has a piece on the role Goldman Sachs has played ------------------ Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. [ ] It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. [ ] In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come. [ ] For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives. more at this link http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp --------- Well, Goldmans Sachs may be Satan, but Greece is the one who dealt with the devil. Apparently, the reason this all came to a head is because the previous admin forecast a debt just over 3%. The new admin came in and said it was over 12!

Pat Patterson on :

Greece seems to be in the position of the serial killer who begs the police to stop him before he kills again. Those poor Greeks never had a chance with all those expense account investment bankers arriving with suitcases full of cash and forcing the government to take the money. Honestly, some times the US can't win as one article will talk about how clueless Americans are about their economy and then in perfect axels describe how those Yankee traders grifted those poor trusting Greeks. But I suppose that noting that most of this transaction was arranged by the London office of Golden Pants won't deflect any criticism.

Marie Claude on :

uh, say, some guis had to save their pants, and get as much money as they could withing their cheating marckets, according to Igor Panarin you're going to collapse at the end of this year too http://online.wsj.com/article/SB123051100709638419.html

Pat Patterson on :

Are you saying that the unions in Greece are the cheaters as they were the ones who got most of this borrowed money in the form of bonuses?

Marie Claude on :

some serious papers say that the true cheaters are the fellows that you bailed out with your tax money

Pat Patterson on :

But who cheated in Greece those that arranged the loan or those that accepted it as free money?

Marie Claude on :

what is at the origin of the world the chicken or the egg ?

Joe Noory on :

It is extremely clear that this is not a "chicken or egg" scenario. Departments of the Greek government wanted outfits like Goldman Sachs to find them monetary vehicles. The GREEK GOVERNMENT are the body governing the legality of what Goldman Sachs does when they are commissioned by the Greek government, even if it was a case of Goldman Sachs approaching the Greek government with an instrument to address what they stated to the financial was a need.

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