What is PIIGS?

By John Ballard

Shouldn't that title read What are PIIGS?
Well, no.
The "S" is an important part of an acronym.

PIIGS stands for Portugal, Italy, Ireland, Greece and Spain.
And the acronym is the cold-blooded term used by macroeconomics analysts to talk about these little countries regarding their sovereign debt.

How this group got lumped together in the first place is a mystery to me, as well as why other candidates (I'm thinking Iceland, Belgium and a few others) were omitted. My guess is it has to do with the Euro and the nosebleed reaches of currency exchange rates. Maybe a better informed reader can help me out here.

Global macroeconomics is in the same clategory as climate change. Everyone is affected, there is widespread disagreement about what constitutes cause and effect, and even experts seem to be in a constant state of disagreement. And like climate change, most Americans are in a dark cloud of denial and ignorance regarding global macroeconomics. We criticize our media for not reporting important developments, but eyes glaze over when they start talking about numbers. We listen to economic reports in the same way we listen to sports reporting -- hurry up and get to the (insert favorite sport here) news; lthis other stuff doesn't interest me.

I bring this up today because like it or not the subject is directly related to another leading story, that of the Catfood Commission report and it's universally hated propositions about how best to address the budget deficit. Some say tuh-MAY-to, others say tuh-MAH-to, but no matter what you call it, budget deficit equals sovereign debt and that affects how the US fits together in the world economy. Like it or not, what that herd of cattle we call Congress does in the next session will have serious consequences for ordinary people for years to come.

In the interest of informed debate here are a couple of links that may shed light on the discussion.

?Wikipedia's List of countries by external debt, defined as the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services, where the public debt is the money or credit owed by any level of government, from central to local, and the private debt the money or credit owed by private households or private corporations based in the country under consideration.

Notice which country is at the top. The US sports in excess of thirteen trillion big ones like bling on a pimp. But hey, we pwn everyone else, no? And the UK is right behind with nine-plus. You have to travel a dozen countries down the list to find numbers in the hundreds of billions instead of trillions, but quick -- before your eyes glaze over --  make note of the fact that China looks pretty good on this list. I heard that China holds   us by the nuts  a large percent of America's foreign debt and according to the list that's peanuts (7%) compared with its gross domestic product.

?"Sovereign debt" is the latest buzzword, usually coupled with "crisis." Take a look at what comes up with today's news...

The insider�s guide to Europe's debt crisis

Europe�s sovereign-debt woes are not going away soon even though Greece and now Ireland have succeeded in getting bailouts, says Mr. Koebler of Natcan Investment Management. �The market decided to ignore the problem for six months [after the Greek crisis], but we knew there was a lingering problem � This crisis will take years to melt away because governments have accumulated huge deficits and it will take time for them � to take their debt down to sustainable levels.�

Since the start of the global financial crisis in 2008, the manager has been underweight the financial sector compared with the MSCI Europe Index. �We didn�t jump back into financials early this year when people thought the crisis was over around June or July,� he said. �We have zero exposure to Ireland and Greece.�

etc.

How Likely Is Default in Europe?

The big question of the week in Europe is deceptively simple � will any countries that share the euro as their currency default on their government or bank debts in the foreseeable future? The answer to this question determines how you regard bonds from Portugal, Spain, Italy, Belgium and, perhaps, others, as well.

This question is not as simple as it seems. Answering it involves taking a view on three intricate issues: What exactly is the current euro-zone policy on bailouts, can big euro-zone countries really be bailed out if needed and what happens to the politics of these countries and of the euro zone as a whole, as pressure from the financial markets mounts?

The prevailing consensus � and the official spin � is that European leaders backed away last weekend from the German proposal to impose losses on creditors as an automatic condition of future bailouts, starting in 2013. In this view, the markets should calm (and are likely to) as there is no immediate prospect of any kind of sovereign default or, as the more polite like to say, a �reprofiling� of debt, including the obligations of big banks.

etc.

Global Sovereign Debt Default Bankruptcy Bailout and Contagion Risk Analysis

This analysis seeks to update the global sovereign risk of bankruptcy following the developments of the past 9 months that have seen governments and economic policies change, economic austerity plans implemented or failure to implement, as well as the bailout of two Eurozone member countries with first Greece in May and now Ireland's Euro 85 billion bailout.

etc.

This last link includes a pretty bar graph labeled "Global Debt Crisis -- Country % Risk of Bankruptcy." (In red, of course.) It strikes me as odd to speak of a country going bankrupt, but I suppose it could happen. Sort of.
It brings up the question of which courthouse steps would be used to sell off available assets, who might the buyers be and how might those assets be of any value if they remaining in a country with no means of economic survival?

This post was already started when I had to go to an assignment this morning. But on the way I heard a feature on NPR directly addressing the exact question I have been asking myself ever since I became aware of this relatively new term, sovereign debt.

How can we speak rationally about *sovereign* debt when all debts are owed by specific borrowers to specific lenders?

Listen to this story or read the following transcript. (It's only four minutes long and at the moment is being sponsored, believe it or not, by a bank!)

Am I wrong or does this sound suspiciously like securitized debt writ large? Remember securitized cebt? That's what happened when mortgages were sliced, diced, arranged in tranches* and magically became assets instead of liabilities.

Listen and/or read carefully. This is more fun than Rubik's cube.

For a long time, people in the financial industry seemed to be following a don't ask, don't tell policy when it came to financial risks. Ireland is the latest country being forced to change that. Like its other European neighbors, it's been spending a lot of money it doesn't have. And it wound up in the situation that debt-ridden countries fear - unable to borrow, at least not at a reasonable rate.

This week, Europe agreed to lend Ireland the money that nobody else will. Alex Blumberg and Chana Joffe-Walt of our Planet Money team report that the money to bail out Ireland comes from a surprising place.

CHANA JOFFE-WALT: The bailout sounds very serious and very substantial.

Mr. SATYAJIT DAS (Financial risk consultant): The European Financial stability fund. This is a 750 billion euro, so it's pretty close to a trillion dollar facility.*

ALEX BLUMBERG: Satyajit Das is an author and financial risk consultant. And he says two things. One, that trillion dollars, it's not all for Ireland. Two, that trillion dollars doesnt actually exist. In fact, the stabilization fund currently has no money in it at all.

JOFFE-WALT: The trillion dollars, its more aspirational - a trillion dollars that could be there, if needed.

BLUMBERG: If needed, the Stabilization Fund could borrow money and then lend that money to Ireland. And maybe in the future, other European countries that are having trouble borrowing, like Portugal and Spain.

JOFFE-WALT: But that's confusing, because if people are scared of loaning money to Ireland, Portugal and Spain, why would they loan money to a fund, whose sole function is to loan money to Ireland, Portugal and Spain?

BLUMBERG: Ah, because the fund is safer, it's backed by 14 different European countries who all guarantee your money back.

JOFFE-WALT: Wait. But don't those European countries include Spain and Portugal?

BLUMBERG: Well, yes. They do.

Mr. DAS: Portugal, who can't borrow is guaranteeing this. So you've got basically, people who are being lent to who can't pay you back, and the guarantors aren't solvent either. So exactly, what are you doing?

BLUMBERG: To be fair, other European countries like Germany and France, which are in much better shape, are guaranteeing the fund as well.

JOFFE-WALT: Up until this week, this was all hypothetical, the fund had not actually raised or lent out a single euro.

BLUMBERG: But now that it needs to, the Stabilization Fund is going around and hitting up investors.

Mr. SCOTT MATHER (Managing Director, PIMCO): Certainly they've had several initial conversations with us already.

JOFFE-WALT: Scott Mather is the managing director at the huge bond investor PIMCO. It manages more than a trillion dollars which it invests all over the world, but not in Ireland. Ireland is too risky.

BLUMBERG: But Scott is considering lending money to the Stabilization Fund. It's got all these other countries in Europe guaranteeing it.

JOFFE-WALT: But on the other hand, some of those countries that are guaranteeing it now, might need the Stabilization Fund later to bail them out. Also...

Mr. MATHER: To the extent that countries like Ireland and Portugal draw on the program, and countries like Spain and Italy are required to guarantee some amount of debt, there's no question that's deteriorating their own credit-worthiness.

BLUMBERG: And so the more Ireland taps this fund, the more that adds to Spain's already sizable debt burden?

Mr. MATHER: Correct. BLUMBERG: So in other words. The more the fund is used, the more likely it becomes that other countries will need to use the fund to bail them out, as well.

JOFFE-WALT: So assuming the Stabilization Fund can convince people like Scott to lend it money, and it thinks it can, that brings us to the very last irony here. Scott stopped investing in Ireland because he manages the funds of very conservative investors.

BLUMBERG: Which are the exact investors the Stabilization Fund now needs to make that aspirational $1 trillion materialize. Again, here's Satyajit Das.

Mr. DAS: Pension funds and other investors who buy normally highly-rated, which is triple-A rated bonds...

BLUMBERG: So the people who are bailing out Ireland are teachers and postal workers? The people who are actually buying the triple-A...

Mr. DAS: Absolutely, you and me.

BLUMBERG: You and me, pension funds and other...

Mr. DAS: Absolutely.

BLUMBERG: Yeah.

JOFFE-WALT: In January, the Stabilization Fund will issue its first bond. It will ask the Scott Mathers of the world to invest pension and retirement dollars into the project of stabilizing Europe. I'm Chana Joffe-Walt.

BLUMBERG: I'm Alex Blumberg, NPR news.

INSKEEP: It's MORNING EDITION from NPR News.

This describes, dear reader, a credit default swap.The only difference between this arrangement and those of AIG is the breathtaking magnitude of the transactions and the unbelievable equivalent of entire nations treated as nothing more than corporate entities in a corrupt new incarnation of arbitrage. And who are the poor souls who will be caught when this house of cards collapses? One way or another it will be those least able to afford the loss who watch helplessly as their assets evaporate in a protracted period of inflation, or are rendered worthless by currency exchange prestidigitation.

I very much want to be wrong about this.  What am I missing????

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* Facility in this case is a banking term, loosely meaning understanding or agreement about debt.

** Tranche is to finance what shish kabob is to food, small bites on a skewer to be cooked and eaten all at one sitting. Problems arise, however, when something fragile (tomato, for instance) which cooks in twenty seconds is cooked side-by-side with something else (raw pork, for example) that needs a good fifteen minutes. Big problem if the wrong stuff is on the skewer: overcook the tomato or risk trichinosis.
I notice the term shishkebab has been picked up by by the video game people to describe a makeshift destructive device comprised of scraps of commonly available components. Perhaps they got the idea from reading the financial news. Or IED construction. I'm waiting to see what kind of weapon a tranche might be.