Saturday, October 06, 2012

When PIGS Come Out in The Open

Ireland’s Rescue has Failed to Stem off Market Tensions from Euro Zone. B&E talks to Experts, Including the European Central Bank, to Analyse who will be the next Victim of Sovereign Debt Crisis.

If you thought that the recent agreement to provide Ireland with $114 billion to deal with its banking and fiscal problems was the European Union’s (EU) last in the series of bailouts, which started with Greece ($147 billion bailout in May 2010), then you have definitely failed to estimate the fury of the financial storm engulfing Europe. In fact, considering the continously deteriorating strengths of the fiscal and banking systems in nations like Spain, Portugal, Italy, et al, several economists believe that the tornado doesn’t end here. If not, then whose is next?

Though Eszter Miltenyi, Sr. Press Officer at European Central Bank (ECB) finds an excuse to get away from revealing that big name by telling B&E that, “I am afraid we won’t be able to answer this question,” there are still many who are bold enough to speak the truth. Enam Ahmed, the London-based Sr. Economist at the Moody’s Analytics, tells B&E, “The contagion from the fiscal problems of Greece & Ireland is spreading beyond Portugal & Spain, which are clearly next on the market hit list to receive EU-IMF help.”

And why not? The signals sent by Portugal and Spain are almost similar to the ones propelled by Greece and Ireland just before the financial storm hit their shores. Like its distressed Euro-partners, they both have a fragile public finance. In fact, Portugal’s budget deficit is already around 9.3% (in 2009), which is an astonishing 6.3% higher than the standards set by EU. Even the country’s foreign liabilities are close to 108% of its GDP ($225.35 billion), much higher when compared with Greece whose foreign liabilities stood at 87% of GDP ($264.82 billion) at the time of the collapse. Ten-year government bond yields are too hovering just below 7%, a level that Portuguese policymakers too accept as unsustainable.

Considering this, the European Commission’s report on the 2010 fiscal deficits of the EU member states, which is due to be published in January 2011, will be closely followed by investors. If Portugal fails to meet its target to bring down its fiscal deficit to 7.3% of GDP in 2010 the interest rates will shoot up further complicating things for Portuguese policymakers. Though, the economy has a $13.5 billion financing requirement in April 2011, it could be forced to go to the EU-IMF before then. If it happens, a minimum of $67 billion bailout package would be needed to save the nation from defaulting on its debt. Even CMA DataVision, a UK-based research firm that tracks the riskiness of sovereign debt, rates Portugal’s performance during Q3 2010 to be the second-worst in the world after Ireland. As per it, the spread between the starting price of swaps in July 2010 and the end price in September 2010 has widened to 30.4%.


Source : IIPM Editorial, 2012.

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