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Opinion: Europe hopes PIIGS will fly

EU seems paralyzed by the realization that Greece and other profligate spenders could drag the whole continent back toward the economic abyss.

A piglet flies past an announcer into a water-filled pool during a pig diving exhibition at Sydney's Royal Easter Show, March 18, 2005. (Tim Wimborne/Reuters)

NEW YORK — The Greek government’s decision this month to come clean on the true state of its finances has shaken the European Union and posed a life-and-death question for the world’s most powerful trade bloc: Can the EU allow one of its own to go bankrupt?

Greece, followed closely by at least four other EU nations, is so comprehensively over its head in debt that international markets have pounced, driving up the cost of Greece’s government borrowing to the point where default — the international financial term for going flat bust — is a very real possibility.

Read more about the EU deal with Greece. 

And if Greece goes, others may follow. Those others — derisively grouped together as Europe’s “PIIGS” by waggish traders — are Portugal, Italy, Ireland, Greece and Spain. They share a dubious distinction of having debt levels that exceed (or are on target very soon to exceed) their GDP. In simple, Main Street terms, these economies are underwater.

Playing chicken with PIIGS

The response from the EU and its capitals has bordered on denial. Officials in Germany, the EU’s largest economy, have pledged there would be no rescue of Greece and tsk-tsked that all of these piggies would have to put their straw houses in order. The German strategy — which due to the country’s heft in the EU has been adopted in Brussels, too — is the equivalent of telling financial markets, “Move along please. Nothing to see here.”

But the markets aren’t buying it, and as the well-regarded analysts at Danske Bank put it in a report earlier this month, “You can’t put lipstick on a PIIG.” Like many, the bank disregards the idea that the EU would allow any of its member-states to default, arguing that such a move would do to the EU what the Lehman Brothers bankruptcy did to investment banks in 2008. A Greek default, they wrote, “is likely to be highly contagious and would undermine the whole [European] project.”

Yet like the last days of Lehman, Greece and the other PIIGS find themselves under assault from investors seeking to capitalize on their misfortune. Yields on Greek government bonds — which rise in inverse proportion to their market value — have skyrocketed in recent months.
A similar problems is afflicting Portugal, widely viewed as the next most vulnerable, and Ireland. Spain and Italy, while also over their heads in debt, have much larger, more diversified economies and are thought to be better able to withstand the pressure.

Straw houses

That leaves the piglets — Greece, Ireland and Portugal — feeling very exposed in their houses of straw.

Ireland, whose “Celtic Tiger” economy floated earlier in the decade on a sea of real estate debt, in December passed a budget that slashed public sector payrolls, raised new taxes and cut $3.6 billion from national spending — a huge amount in such a small economy — in order to bring its annual budget deficit back down to the 3 percent limit that all countries using the euro pledge to maintain.