PIGS Crash

Last year, even before swine flu emerged as the major health issue on the global agenda, the PIGS became a major problem. This was the acronym given to the four southern Mediterranean members of the European Union — Portugal, Italy, Greece and Spain – whose supposedly strong economies were exposed by the global crisis as suffering from severe structural weakness. To these must be added Ireland, which in many senses came to replace Italy within the acronym, as its property boom turned to bust, bankrupting the Irish banking system and dragging the country headlong into deep recession.

Ireland has been discussed here frequently, including very recently, but this week Ireland lost top billing to Greece and Spain. Greece has been the disaster-flavour-of-the-week, seemingly thanks to the fall-out from the Dubai debacle — which itself was anything but a surprise to anyone who keeps tabs on the global credit (bank lending) and debit (bond issues) markets. In the wake of Dubai’s effective default, Greek government bonds – and the Greek stock market – were hammered by investors last week and the week before, but this week the ratings agencies took on the main Greek-bashing role. On Monday, Standard and Poor’s warned Greece that it was considering downgrading Greek government debt from its current A- standing; on Tuesday, Fitch announced that it was doing exactly that.

Readers with long memories will recall that Greece was in the headlines last December, too. That was because the government announced some tough measures which, although essential in the face of the raging crisis, triggered rioting that went on for days and shook the country. Since then, and no doubt partially as a consequence, the conservative government then in office was defeated in elections held in October. The new socialist government, which campaigned on the promise to protect incomes and boost welfare spending, inherited a far worse mess than anyone knew existed. A few weeks after taking office, the new government was obliged to admit that its predecessor had shamelessly cooked the books on the government’s accounts. Thus the budget deficit, which the previous government had told the EU and the world would be only 3% of GDP this year and 4% next year – was in fact heading for around 12% of GDP. This level is not merely quadruple the 3% ceiling set by the EU treaties to which Greece is a signatory, it also suggests the country is well on the way to financial ruin.

Yet Greece was far from being alone in the spotlight this week. Spain, another member of the PIGS quads, was also in trouble with the ratings agencies: S&P placed it on negative ratings outlook on Thursday, usually a prelude to a downgrade. Ireland was also in the news, although for a different reason: its government is finally showing signs of biting the bullet. The budget announced to parliament yesterday includes – at last – serious efforts to cut public spending and reduce welfare payments. This is exactly what the Greeks must do, but no-one — least of all in Greece itself – believes that the new government will do it. Even if its does try, the fierce response of the unions and of the general public will probably force it to dilute or quash its proposals. Only a country as near bankruptcy as Ireland, and as willing to pass real decision-making over to Frankfurt and Brussels, could dare propose to hit the hitherto-sacrosanct public sector.

This is the common factor binding Ireland to the original PIGS group – and the link extends to the UK and, indeed, many European countries (and Israel, too): when the going gets tough, the private sector gets clobbered – but the public sector remains untouched. Only a mega-crisis can force unwilling governments to try and cut back the feather-bedding, near-guaranteed employment and the host of perks and privileges that characterise the public sector in European (and European-style) countries. However, even when these extreme circumstances arise, no-one believes the government will do what is by now not merely essential but inevitable (such as raising the pension age, especially for women). Why? Because no-one believes anything government say, even when it promises to be cuddly and generous, let alone when it pretends it will get nasty.

In the financial markets, everyone has always assumed the Greeks were cooking the books – like the Italians did to meet the entry requirements for European Monetary Union in 1998. What has changed is not the level of credulousness, but the level of tolerance. No-one is prepared to put up with these shenanigans any longer – meaning that they won’t lend money to liars any more. It’s a bit like the sub-prime scandal in the US, except that the borrowers are not low-income families or welfare recipients, but rather civil servants and their employer, the national government. But the outcome is the same: when the plug is pulled, when the music stops, the whole edifice of deceit and pretence collapses, leaving a pile of unpaid – and often unpayable – IOUs.

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