 A reader emailed me telling me that my contribution last week omitted Italy from the group of countries making up PIIGS. This is true and quite honestly from my research it appears that there is hesitancy about what the second “I “stands for in PIIGS.
I found that the earliest mention of this term was in Wall Street journal last December. So in my contribution, I erred and the acronym ought to include Portugal, Italy, Ireland Greece and Spain. I apologise for the omission but I still consider that Italy‘s economy is not as badly hit as the other so called Club Med countries. Quoting an economist from Goldman Sachs he speaks about Italy being in a more comfortable position than the other Southern European countries because of a stronger balance sheet.
This is all relative and does not mean that Italy is yet out of the woods. After emerging from its worst recession since World War II in 2009, it is expected to register a “weak recovery” this year.
Not withstanding this prediction, it shook markets with news of a drop in GDP in the fourth quarter of 2009, a year in which the public debt rose to €1,761bn .Definitely Italy is a contender country for the second “I “ in PIIGS .In fact Forbes magazine did place Italy and not Ireland in the PIIGS collection. Such a controversy has permeated in the financial press with each of the two countries vying for exclusion from the PIIGS club. Pro-Irish economists insist that Ireland doesn’t belong in the PIIGS group because despite the seriousness of its present deficit but only four years ago it boasted of a better record than Italy. By contrast, they contend that Italy suffers from long-term structural problems whereas Ireland has taken deep cuts in its national expenditures (including civil servants pay) so the surgery is potentially doing its bit to revive the Irish malady.
Surgery and not palliatives were prescribed to the patient. Just ask for comments from the Irish prime minister who suffered the agony of promulgating such laws. He got a bumpy reaction from unions this winter who protested ferociously against the austerity measures. Typically the banking crisis was purely tied up with an over exposure to property in Irish banks. Therefore the Irish smart move was to install a mechanism which absorbs the dead loans or toxic assets from banks and to cocoon them against further degradation. This mechanism was termed NAMA (National Asset Management Agency ) set and financed by tax payer monies. It cost billions, and it was justified on the pretext that recovery will return if NAMA bought the bad loans and also placed enough billions in new capital into the banks. But critics lament that NAMA is riddled with bureaucracy and as can be expected it has not picked up the necessary speed particularly needed in finishing the valuation work. It is a fact that the Irish property syndrome is a complex one and huge discounts of up to 70 percent in the collateral are not uncommon in the valuations.
The ruling party thinks that this was an opportunistic move and augurs well for a quick recovery from the credit crunch that paralysed the PIIGS economies. If successful NAMA would result in the banks lending to businesses and get the Irish economy going again. Naturally the Irish hope that it will not be long before real estate values rebound. Unless this happens in a fortuitous way the Irish taxpayer is in for a heavy dose of taxes. Paradoxically the act of bailing out the two major Irish banks ,AIB and Bank of Ireland does mean that the taxpayer will end up owning as much as 80% of both banks. What is certain is that the five countries are making a downward pressure on the euro that since November it has dropped more than ten percent against the dollar. The euro slid almost 1 per cent to $1.357 this week, whereas the pound rose to 1.14 euros. In particular fears over Greece’s gaping budget deficit have hurt the euro. Euro skeptics such as the British Tory leader states that they will never consider joining euro once elected in power. Critics of the euro model say that its main fault lies in that the growth of the currency union was too ambitious given that only 8 or 9 (the rich industrial countries) members are payers while the rest including Malta are net recipients. So what is the way forward? Do we weed out the weaklings and trim the euro members to just eight or nine aspiring countries just like a rich man club? This remedy reeks of a lack of solidarity with the concept of a unified currency but in the short term could be the easy way out.
Just consider if the compliance rules were scrupulously applied on Greece statistics but may fear that under hand manipulations were in course to mask the real Greek tragedy. It is a pity how this was sanctioned when highly rewarded Court of auditors in Brussels actually let an elephant pass unnoticed just under their nose. It is fears that Greece wouldn’t be able to refinance almost 17 billion euros in bonds maturing this year that has triggered the alarm. Once the Greeks default on their obligations then their claim as the leader in the PIIGS club goes undisputed. Surely taking collective responsibility on such defaults will force the burden to be shared by the richer members such as Germany and France. This strategy was fully evaluated at a recent E.U top meeting of the 16 members. Surely in practice, a bailout is proving hugely controversial particularly if the share of the burden is carried on by Germany alone.
The German economy is only just slowly waking up to a revival and does not relish the addition of more tolls to bail out the PIIGS. As you would expect the bailing out of Greece is hugely unpopular with the hard pressed German workers. They rather that Greeks tighten up their belts ( like the Irish did ) and embrace a harsh austerity program to rein in their past profligacy. It is true that Greece has already pledged to cut its public sector payroll and raise taxes on alcohol, tobacco and fuel. But is this enough to make up for the confidence crisis arising by massive debt servicing costs? There is a limit how much pain can be inflicted on taxpayers in a view to solve present financial problems without seriously endangering its own social cohesion. It is a gamble and the easy way out for Greece is to depart honourably from the euro club and at a second stage devaluate its replacement currency (the old currency the “drachma”) But this goes against the principle of solidarity within the single currency club and the alternative for the Greeks is to remain a euro country and reduce its deficit by four per cent of GDP. Ironically only last week the Greek prime minister, George Papandreou, meekly pronounced that his country was not looking for EU “handouts” to solve its debt crisis.
As a latter day Hercules the Greek spokesman cheerfully insists it can tackle its €300bn debt. The problem is not how but when since the intervening period is tarnishing the euro . Greece’s plight is severe when one considers that deficit budgeted for 2009 was 12.7 percent of GDP. Again contrary to Malta‘s own debt which is largely home grown and repayable to locals the Greek debt is two thirds owned to foreigners. To conclude one can surely agree that the problem will not solve itself unattended. If the euro club is to remain a credible alternative to other major currencies then one cannot contemplate the PIIGS exiting from the euro and resort to devalue their currency as has happened in Argentina in 2001. The governments of PIIGS have to act in a contrite way and start cleaning up their act. Regrettably in some instances this was riddled with “corruption” and “cronyism”, a culture that encouraged tax evasion and invites more debt.
George M. Mangion
gmm@pkfmalta.com
The writer is a partner in PKF a audit and business advisory firm.
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