Portugal And Spain Next?

Fears that the infamous PIGS — Portugal, Ireland, Greece and Spain — would spell trouble for the world at large have resurfaced. When the sovereign debt crisis first hit Greece about six months ago, the global economy tottered. But it recovered after an initially-reluctant Germany agreed to a bailout package. That helped Greece tide over the worst of the crisis and, for a while, it seemed that raised the spectre of governments defaulting on sovereign borrowing had been banished and the global economy recovered. But as the rapidlydeveloping crisis in Ireland shows, the bailout was not a solution. It only succeeded in buying some time.

The problems of Europe, and indeed of most of the Western world, are structural. Bailout packages cobbled together by the International Monetary Fund (IMF) and the European Union can at best provide breathing space, within which countries have to push through austerity packages that are politically difficult but yet are not excessive to the point of depressing demand and aborting recovery . Monday’s rescue package is not the first, and will not be the last, of many. In Ireland’s case, its bailout of five domestic banks, that cost the exchequer €45 billion, proved too much for its already enfeebled public finances and triggered fears of sovereign default all over again!

The biggest worry on investors’ minds now is: who’s next. Portugal? Spain? And after that, who? Will the contagion spread or can it be contained? Greece needed €110 billion ($145 billion) in May 2010, Ireland is set to get €90 billion. For now, Portugal seems better placed than Ireland. So does Spain. Both have rubbished talk of a rescue package. But remember, it was not so long ago that Ireland was feted as the Celtic tiger. Spain was lauded for its strong banks, as was Portugal. Agreed, budget deficits of the remaining PIGS are much less worrisome at 9.5% and 9.3% of GDP, compared to Greece’s 15.4% and Ireland’s 14.3%. Agreed, quantitative easing by the US Federal Reserve should provide enough global liquidity . But, for now, one can only wait and watch. And, of course, urge the G20 to shed the sense of complacency that the grouping seems to have acquired after their initial frenetic moments of coordinated action, to work faster for a solution to global economic woes.