Overview: PIGS on the Wing

Building on the success of BRICs, a new four-letter acronym recently appeared in the lexicon of modern finance. PIGS is the aggregation of Portugal, Italy, Greece and Spain–in other words, the weaker economies of the EU that threaten the stability of the monetary union. A dangerous divergence is spreading throughout Europe. Core economies, such as Germany, France and Holland, are prospering thanks to the benefits of globalization. Meanwhile, the countries on the periphery, starting with the PIGS, are wallowing under the weight of an overvalued exchange rate and large current account deficits. The disparity in performance is putting stress on the currency union that binds the region together. An eventual dismemberment of the union could cast a dark shadow on the Euro and create an unexpected rally in the dollar.

The German economy is thriving. The number of unemployed Germans dropped by a third in March, when compared to November 2005- despite turmoil in the global financial community. The unemployment rate now stands at the lowest level in more than 15 years. Germany was lightly affected by the global credit boom. There was very little increase in home prices or accumulation of household debt. Therefore, the deleveraging is not having much of an effect on German households. On the contrary, German business sentiment is improving. The Ifo Institute reported that business climate improved for the third consecutive month in March. The modernization of the Asian economies provided Germany with a tremendous boost as the demand for machine parts and specialized engineering services increased. German exports rose by 3.8% m/m in January-marking the largest monthly increase since September 2006. Similar winds are propelling some of its neighbors, with France and Holland thriving in spite of the over-valued currency. In France, the Insee statistical office reported that business confidence improved to 109 in March, versus 107 in February. Unfortunately, the optimism was not shared by the southern flank of the European Union.

There are 27 members of the European Union, but only a handful are truly export-based economies. The rest are service and component providers for the core. Therefore, the benefits of globalization were not registered as strongly in the periphery. However, the appreciation of the euro left them with an expanding current account gap. The abundant liquidity during the credit boom allowed them to offset the shortfall by attracting strong capital inflows. However, the implosion of the credit bubble left these countries stranded, lashed to a fixed exchange rate and with a deep recession on the horizon. Spain is at the heart of the crisis, suffering the implosion of its housing sector. The number of Spanish construction groups filing for creditor protection surged 87% y/y, during the fourth quarter of 2007. Housing starts are expected to fall by more than 25% y/y in 2008, and the Bank of Spain recently revised down its current GDP growth projections. Spain’s woes are being repeated throughout the periphery of the European Union-particularly among those countries with large current account deficits.

Hungary abandoned its trading relationship with the euro in late February, allowing the forint to float freely. The bond spreads and CDS of the peripheral countries are widening, reflecting the mounting concerns. Many governments, such as Latvia, are running to the international markets to help replace the capital that was flowing into the private sector. Further afield, countries whose currencies were considered to be convergence trades with the euro are unraveling. The Turkish Lira and the Icelandic Krona were two of the most recent victims. Countries with large current account deficits and currency pegs are being slaughtered by the deleveraging process like PIGS in an abattoir. The ripples of the crisis are spreading slowly. The epicenter is Europe, but the damage is propagating. South Africa already fell, and the problems will soon spread across the Atlantic to consume countries with large shortfalls, such as those in the Caribbean, Central American and Colombia.

4 Responses to "Overview: PIGS on the Wing"

  1. eparisi   April 12, 2008 at 12:23 pm

    It’s maybe a bit early for a rally in the dollar but I certainly share the concerns for the EMU’s Club Med countries. Even if aggressive reforms were undertaken now, they would not pay off until the next cyclical upswing as the German experience shows. Given the cyclical spillovers from the U.S. and the fallout from the credit markets we might well wait for pigs to fly..

  2. Detlef Guertler   April 14, 2008 at 6:45 am

    You don’t need aggressive reforms in Club Med – you just have to change the ways of living and doing business. You just have to finish overspending, overinflating and underachieving.Okay, just kidding. It’s easier to throw the South out of the Eurozone. Maybe the North of Spain will stay inside, because Catalunya, Pais Vasco and Galicia won’t like to join the Spanish depression that has just begun. And Italy could desintegrate in the same way.Just kidding again?

  3. Anonymous   April 22, 2008 at 9:17 am

    Mr Guertler,Your appreciations seem too prejudiced and resentful. I agree that the economies of the Mediterranean (including France) need structural reforms, but they are in need of different types of reforms. Some of these economies have been lagging for years (Portugal and Italy), and some have done a decent job.All of them are right now suffering from a slowdown that has a lot to do with their excesses. This is not something occurring only in Southern Europe. I’d say that it happens everywhere but in Germany. The reason is that Germany has been until very recently, the sick man of Europe, (Low growth, increasing unemployment, high and increasing fiscal deficit sclerotic companies). And the country was too focused in getting better to get into the current mess the rest of the world is in.If reform has been possible, and somewhat successful (we still have to see the increase in expor figures transform in higher consumption rates), in such a decentralized country, why can’t it be in other countries? Oh, I forgot, in the south of Europe, we overspend, over inflate and under achieve. I also find it especially funny that you talk about the political implications of the slowdown. Specifically in Spain two of the regions you talk about (Basque country and Catalonia), may be most affected by the current crisis. They went through the same excesses as the rest of the country, and on top of that they are highly industrial economies, and thus very exposed to delocalization of their factories.Please document yourself. Or where you just kidding?

  4. Guest   January 30, 2009 at 10:40 am

    Get your xenophobic acronym up your A S S and re-write the article with some respect.In doing so, take some time to check the facts.¿Walter Mola? No