PIGS: Weakest Sovereigns

THE PIGS ( Portugal, Ireland,Greece & Spain )

As it is well known, the biggest problem economies in the Euro-area are Ireland, Spain and Greece, all of which are mired in debt and economic malaise.

The Irish economy, with a debt-to-GDP ratio forecast to rise from the current 66% to 96% by 2011, is obviously in miserable shape, but at least the government appears willing to take painful and politically risky measures–massive wage cuts and income reductions are being implemented across the spectrum, in tandem with proposed tax increases on income and levies on public sector pensions.

In Spain and Greece, by contrast, the governments still appear resistant to hard choices that might help them tackle their debt, which in Greece’s case is forecast to rise from the current 112% to 130% of GDP by 2011. Within weeks of winning the country’s elections in October, the Greek socialist government raised the budget deficit forecast to 12.7%, twice the previous government’s forecast.

Spain’s debt to GDP ratio at 55% is below the European average, but it is suffering the ongoing effects of a major housing bubble implosion. Yet unit labor costs in Spain rose +0.4%YoY in the third quarter despite an 19.3% unemployment rate. More worrying are the fears that European banks in general and Spanish banks in particular have been slow to write off bad assets (how could Spanish banks have managed to largely avoid Spain’s massive housing bust?).

With these concerns coming, we see another reason to sell the Euro vs the US$, though the coming decline of the Euro from the current very overvalued levels will not provide countries like Ireland and Greece much relief in the near future.

After all, in terms of their real effective exchange rates, these two countries, along with Spain, have appreciated the most in the past decade.