For over a year this author has prognosticated that the massive spending spree Helicopter Ben (Bernanke that is )has undertaken will ruin the economy and our country. Now don't get me wrong, Ben did keep the world from falling of the proverbial mother of all cliffs....but as this author has also commented repeatedly, that the fix implemented will be the next negative catalyst to our economy and global financial markets.This week, we got word that the PIGS were in trouble. Funny acronym. They are PIGS. Drowning in their own debt, these 4 countries are incapable of paying off said debt. So what exactly is going on here? An article in The Observer dated Feb. 7, 2009 gives a great summary written by Ashley Seager:
"The governments of Greece and Portugal, and also Spain and Italy, are under attack from the bond markets. That may not sound like a national emergency for the countries concerned but the financial impact is real.
Greece started the rot late last year when it revealed that its budget deficit would be twice as big as it thought. Markets hate uncertainty, and being lied to.
So they sold Greek government bonds with a vengeance. That matters because governments that run big deficits need to finance them by selling new bonds to financial markets. If people don't want to buy them, they have to offer a higher coupon, or interest rate, to investors.
By selling off existing Greek bonds, dealers pushed up the yields on those bonds because yields move inversely to price.
In normal times you would expect any sovereign debt of a member country of the euro zone to trade at similar yields to those of the bloc's heavyweight – Germany.
But no longer. The so-called "spread", or difference, between Greek bond yields and bunds (German bonds) widened to nearly 400 basis points late last month. That means if bunds are yielding 3%, Greek bond yields are more like 7%. When Greece recently made a new bond issue, it had to put a coupon on the gilt of a hefty 6.2%. This "risk premium" that investors demand in exchange for holding Greek bonds has shot up because the risk of default has surged with the budget deficit.
That means that the Greeks have to pay twice as much to borrow money to finance their deficit as the Germans. And that is bad news for a country already running a deficit of nearly 13% of national income.The spread of Greek bonds over bunds fell back a bit last week after the European Commission accepted Greek government assurances that it would slash its budget deficit this year.
But the problems are no longer confined to Greece. Attention swung last week to the other southern Europe economies, known rather unkindly as the "Pigs" (Portugal, Italy, Greece and Spain).
The spread of Portuguese debt shot up to around 175 basis points over bunds, but remained well below that of Greece."The state of Portugal's public finances is challenging. Gross government debt reached 77% of GDP in 2009 and, with an expected deficit of over 8% this year, it should rise further. We expect the debt ratio to reach 95% of GDP in 2014," said Christel Aranda-Hassel, economist at Credit Suisse. "Portugal's relatively weak economic performance poses one of the main medium-term risks."
And all the uncertainty surrounding sovereign debt worries spread late last week into many other markets, spreading renewed fears about the strength of the recovery in the global economy.
If all main economies have to struggle to pay off the huge deficits run up as a result of their recessions, they could be squeezed by rising taxes and spending cuts for years to come. Suddenly, the robust global recovery world stock markets were pricing in looks a bit overoptimistic.
Ole Hansen, a senior manager at Saxo Bank, put it like this: "On Thursday Portuguese and Spanish stocks suffered their biggest daily fall since 2008 as the worries surrounding Greece spread to other weak economies within the Euro zone.
"This fear led to sharp falls in shares across continents and a worldwide flight to the safety of US dollar and treasuries. The euro traded down to a seven month low and all projections about a year of continued dollar weakness has all but disappeared, for now at least."
Finally, though, a note about Ireland. The Irish economy tanked in the global recession, losing more than 10% of its national output. The accompanying graph, though, shows that markets were convinced by the Irish government's emergency, austerity budget last year. The spread of Irish debt over bunds has fallen back somewhat.
Ireland has decided to take the whole thing on the chin and make the painful budget adjustments straight away. The markets believe them, but they don't yet believe Greece and the other Pigs."
So how can are these 4 piece of shit countries weigh on an economic recovery here in America? Simple. If developed countries like the PIGS stop paying their debt and ultimately default on same, we will see higher borrowing costs around the globe. Moreover if Greece or other PIGS nations default it will limit the amount of money governments can borrow. That would be a significant negative for America where debt is the country's largest export.
Moreover and one last solemn thought: In 2008 when Bear Sterns went belly up, we were told that that was it. Problem solved and no other financial institutions were at risk. Fast forward 2 years and how many banks are closed or merged with others? Many. Too many. My sense is that this is the beginning of something new, and ultimately worse than what we experienced in 08-09.
As I sat at my desk 4 weeks ago after a long week of trading, earnings previews etc, I announced at 3:55pm that my new S&P target over the next 2 years is 465. If you recall in 08 I predicted 624 in the S&P. We made a bottom at 666. So you may say I am crazy but I am reading the tea leaves and the only conclusion I can come up with is a massive sell off in global equity markets as the GLOBAL financial crises led by defaulting governments drives the global economy into a horrible tailspin.
Sorry for the gloom and doom on Super Bowl Sunday, but consider yourselves warned. Go SAINTS!
--The Angry Trader
