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PIGS rescued

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by Peter Switzer

Markets hate uncertainty, especially negative uncertainty, and right now the PIGS of Europe are spooking the ‘you know what’ out of bond and stock markets. Thankfully, the right noises are coming out of Germany who could wind up being the big brother for Portugal, Italy, Greece and Spain as they struggle with their debt issues.

Debt to GDP

By the way, this PIGS thing looks a little unfair, especially on Italy. The group are linked, primarily because of their net debt to GDP problems. For Greece it’s 87 per cent, Spain is 91 per cent, Portugal is at 108 per cent and Italy is only at 23 per cent.

To be fair, Ireland should be in the PIGS but that would take out the common Latin-link between the economies and Ireland has done something pretty well that has helped it through this sovereign debt mess.

Ireland’s debt to GDP ratio is 60 per cent but it started the GFC with a low level of Government debt. And on top to that the Irish have taken their GFC medicine and bond markets trust them more than the PIGS.

Matter of trust

The UK Guardian newspaper recently said the Irish economy tanked in the global recession, losing more than 10 per cent of its national output but because the Government's took an emergency, austerity budget last year the spread of Irish debt over the very sage German bond has fallen back to more acceptable levels.

On the other hand the Greeks shocked the market with a budget deficit two times greater than expected and now they pay 400 basis points or four per cent more for money going into Greek bonds.

Right steps

In early US reports it was thought that Germany was going to ride to the PIGS’ rescue.

This is what CNBC in the USA reported around the time of the closing bell on Wall Street: “Europe appeared to be moving closer to working out some kind of rescue plan despite conflicting reports earlier in the day. The Wall Street Journal reported just before the closing bell that Germany is considering loan guarantees for Greece and other troubled European countries.”

These are the right steps to placate markets and this is why the Dow Jones Index went up 150.25 points or 1.52 per cent to 10,058.64 and the S&P 500 rose 13.78 points or 1.3 per cent to 1070.52.

Focus on the main game

For the stock market, this is a first step in the right direction but now the follow up details of the Germany rescue of the PIGS will have to satisfy investors and analysts. Once that gets done, then investors can concentrate on the main games of the global economic growth and corporate performance by the more important economic players in the world — the non-PIGS if you like.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, February 10, 2010