Posts Tagged ‘PIIGS’

Is the Greek debt crisis over?

Sunday, April 18th, 2010

When you read the latest statement on monetary policy decision of the Reserve Bank of Australia (RBA), you will find that they believe that the Greek sovereign debt crisis is contained for the moment:

The concerns regarding some sovereigns appear to have been contained at this stage.

The language is reminiscent of the start of the sub-prime mortgage problems. Currently, it seems that the global financial markets are shrugging off the possibility of a Greek government debt default, which has a wider implication on the Euro as a currency, which in turn has a wider implication on the global financial markets (see All quiet on the Greek front?).

But dear readers, do not be fooled by this apparent calm. Sure, the concerns looked ?contained? but the problems are still simmering. To let appreciate this situation, look at the following facts:

  1. Greece has to pay 4% more for their debt than Germany, the most credit-worthy nation. That?s roughly twice the margin from January 2010, at the height of the financial market jitters.
  2. The most recent attempt by the Greek government to raise money was very undersubscribed.
  3. Greece needs around ?50 billion in 2010, of which around ?25 billion is needed by June.
  4. After 2010, the Greek government needs to refinance its debt at 7-12% of its GDP.
  5. Greece budget deficit currently sits at 12% of GDP and must be financed as well.
  6. Greek government debt is forecasted to be over 150% of GDP by 2014.
  7. The current ?bailout? package by the EU and IMF is around ?40-45 billion, which is short of what the Greeks need at ?50-75 billion.
  8. The ?bailout? package requires:
    1. ? that Greece must exhaust its ability to borrow from the financial markets first before accessing the package.
    2. ? unanimous agreement among EU members.
    3. ? the debt will be provided at market rates, rather than on concessionary terms (although under new proposals full market rates will not be used).
    4. ? full participation of the IMF, which means the IMF will have a say in the (usually stringent) conditions for the loan.
    5. ? meet Germany?s condition that the EU framework for future bailouts be changed.

As you can see, the Greek problem is going to be more like a trench warfare than a blitzkrieg. It will probably take years, taking down lots of casualties on the way.

Mind you, Greece is not the only country. There are other countries like Portugal, Ireland, Italy, Spain and UK who are going to face the same problem over the next few years. The question is, while the trench warfare is going on in the Greek front for the next couple of (or few) years, can the global financial markets remain orderly when one or more of the Portuguese, Irish, Italian, Spanish and British fronts are opened simultaneously?

Fingers crossed.

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Posted in Bonds, Currencies | 9 Comments »

Currency crisis: first countries in the line of fire- PIIGS

Thursday, January 21st, 2010

In our previous article (Next phase of GFC is when governments go bust), we wondered how can someone protect their savings in the event of currency crisis. Since the word “currency crisis” is a very broad term that can cover all kinds of scenarios, there is no one-size-fit-all solution to this problem. Hopefully, our musings will give you a better idea of where to start investigating and seek professional advice.

As we mentioned before in our previous article, there is a downward trend in many governments’ credit rating. The next stage of the GFC will see governments going bust. The main thing to understand is that this event need not necessarily be imminent. Also, you must not make the mistake of seeing that as a singular event- in reality, it will be a sequence of events punctuated by calm in between, as each country is at different stages of the fiscal cycle. The reason why we say that is because there are plenty of investment tip-sheets, newsletters and reports persuading people to buy their wares by giving the impression that government defaults are imminent events that will happen all at once. The mainstream media is not too helpful too. As investors, you have to be clear that there are time-frames and order of sequences in these events. Not only that, some of these events may not happen at all.

With that, we will continue. Please note that we are not ‘predicting’ or forecasting the future. What we are presenting is just a rough sketch of what may possibly happen.

Currently, the most vulnerable countries to default are the PIIGS countries (Portugal, Italy, Ireland, Greece and Spain). It does not mean that all of them will blow up tomorrow. Marc Faber reckons that a couple of them will blow up within the next two years. Even though we do not know which ones and when exactly it will happen, one thing is clear- since these countries uses the Euro, the viability of the Euro as a currency will be put in question. As we said before in Is this a bear market rally or a turning point?,

The European Union is an economic union but not a political union. Therefore, the European Central Bank (ECB) does not have the same level of authority and political support as the US Federal Reserve. Individual nations using the Euro as their currency cannot simply print money to bail out their financial system because they have surrendered their economic sovereignty to an intra-national authority. To do that, there can be a situation whereby taxpayers of say, Germany, are asked to bail out the taxpayers of say, Spain. Politically, this is too much to ask.

This is where the uncertainty lies. There will be political and legal wrangling on what to do with these wayward PIIGS nations. Will the Euro survive the wrangling? No one knows. Since financial markets hates uncertainty, the Euro will continue to face downward pressure (which is happening right now). Of course, if it is suddenly clear that the Euro will not survive, then its value will be zero straight away. Should that happen, there will be a currency crisis, derivative meltdown (as an effect of PIIGS default or implosion of the Euro) and another global financial panic this very second. Since it is not clear yet, the Euro will continue its orderly descent. In the meantime, the financial markets will keep on guessing while the European authorities will not reveal much of what’s happening in the discussions behind closed doors.

Now, the question is, against which currency will the Euro depreciate against? Someone once said, if currencies are in a beauty contest, the winner will be the least ugly one. The US dollar, even though it is flawed and may not survive as a currency in the long run, has more time on its side. It is less ugly than the Euro. As far as the eye can see, it is more likely to survive longer than the Euro. Therefore, we will see the US dollar ‘strengthening’ against the Euro.

If you are one of the citizens of the PIIGS countries and if it so happen that it is your country that is going to blow up, then there’s no better time to prepare than right now.

In the next article, we will turn our eyes to the next sequence in the time-line.

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Posted in Currencies, Looking Forward | 7 Comments »