Thursday, March 31, 2011

The PIIGS "Extend And Pretend" Period Is Winding Down

by Jeff Snider

Business Insider
March 30, 2011

The near financial failure of Greece in April 2010 nearly caused a global panic. Fortunately (depending on your point of view) the European Central Bank stepped in with a systemic bailout of the entire banking sector. A rescue was put forth for Greek debt, and the crisis was nearly forgotten.

The intention of the Greek bailout, as well as the Irish and soon to be Portuguese, was never about fixing the structural problems. Greece and the other PIIGS (Portugal, Ireland, Italy, Greece, Spain) simply have too much debt compared to post-recession revenue potential. The entitlements that were created on the back of cheap common-currency financing were/are unsustainable.

So the bailout was simply a mechanism to allow Greece to continue to pay some of its bills while it began to unwind parts of those entitlement liabilities. This was absolutely necessary because, as the thinking goes, any credit restructuring and bondholder losses would lock Greece out of the financial markets. That would be the end of this attempt at crisis avoidance since Greece, and the other PIIGS, continues to have massive structural deficits that can only be sustained by outside lenders.

So, to summarize, the PIIGS have to have time to unwind financial commitments in an orderly fashion, i.e., austerity. At the bailout maturity (only two years left for Greece) it is expected that Greece will have its fiscal house in order. But no one in their right mind believes that expense cuts will be enough on their own. It is fully expected that economic growth will have returned to enhance revenue, and reduce the burden of austerity. The Greek plan was sold to the public with extremely rosy assumptions, to put it mildly.


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