The PIIGS are flying

20 May 2011

The 'OK' ones

In my opinion, the best-off country is Italy. Italy has a long-standing reputation for high levels of debt, but Italy's deficit has been fairly stable for most of the last decade. Its economy was not really affected by the banking crisis, with the trend in its deficit and debt levels not changing significantly since 2008. As things currently stand, of the 5 PIIGS Italy has the strongest economy, since it is based around exports rather than services.

The next two countries are ones that were hit hard by the credit crunch, but had entered the crises with fairly good fiscal positions. Before the credit crunch Ireland ran a surplus and had paid off large portions of it national debt. However, like the UK, it had to borrow vast amounts of money to bail out its banking system, which had been affected by a property bubble where the level of speculation was complete insanity. At least in the UK property speculation was at least on the outskirts of cities, whereas in Ireland they had been building housing estates in the middle of nowhere. Italy's banking bail-outs seem to be ongoing, unlike in the UK where they were all concentrated in one year. Like Ireland, Spain had also been running surpluses in recent years, and hence had paid off a lot of national debt in the last decade. Spain also had an insane explosive in construction and needed bank bailouts, but I suspect a lot of the debt that fuelled Spain's bubble was not domestic.

The shaky ones

The remaining two countries, Portugal and Greece, are ones that are basically in trouble because they were running huge deficits even before the credit crunch. Looking at Portugal's debt and deficit levels I suspect it had been doing some refinancing so on paper it had got better last few years, and Portugal does not seem to have had a speculative property bubble, at least not on the scale of Ireland and Spain. However when evaluating a country's creditworthiness it is the deficit that matters more, as that shows that the finances are out of control. A country that has a deficit problem has no realistic chance of reducing debt levels, although I am not too sure if Filch downgrading Portugal to junk status is actually deserved.

And finally

Greece is fucked. Not only does Greece have both a deficit and a debt problem, it had also been fiddling its figures. All the talk now is of haircuts, which is pretty much a partial default, rather than any actual prospect of the debts being paid off. In fact things are so bad that the current struggle is just making sure Greece is able to refinance current debts come next year. Although there has been talk of Greece leaving the Euro, I don't believe this would be of any help. However the only end-game I can see for Greece is a full default, which I think would preclude it remaining officially a Euro-zone country, even if it continues to use the Euro de-facto.