Monday 3 May 2010

The PIGS or should that be the UPIGS

PIGS are an acronym for Portugal, Italy, Greece and Spain. Unlike the BRICS the PIGS have high government debt levels and high government deficits when compared to their GDP’s. Let me take a moment to explain debt and deficit because given that the UK is currently letting governments get away with saying ‘we will halve the deficit’ without really being challenged I don’t think most people understand the difference.

The way I think about it is the deficit is the government’s revenue (taxes, duties, excise, national insurance etc) minus the government’s expenditure (military, HMRC, QUANGOS, NHS, interest payments on the debt etc) in a year. If it’s a positive number it’s a surplus and if it’s a negative number it’s a deficit. The debt is the accumulation of all the deficits/surpluses. Listen carefully this week to the politicians in the run up to the election. They’ll say they are going to reduce the deficit. All this means is that they are going to increase our debt (or as I like to think of it, stealing from the future generations) at slower pace than they currently are.

Let’s look at the debts and deficits of the PIGS:
- Portugal has a debt of about 85% of GDP and a deficit of 9.4% last year.
- Italy has a debt of about 115% of GDP and a deficit of 5.2% last year.
- Greece’s debt is expected to reach 124% of GDP by the end of 2010 and has a current deficit of about 14%.
- Spain has a relatively low debt in comparison of about 53% of GDP but a deficit of 11.2% last year.

In comparison to the PIGS the UK has a debt of 62% of GDP (or 54% if you exclude financial interventions which I won’t) and a deficit of 11.4% last year. So of the five countries the UK’s debt is the fourth worst and the deficit is the second worst meaning our debt is fast catching the other countries year on year thus the acronym UPIGS in today’s post title.

Today’s chart shows how the bond market has responded to all these debts and deficits. Up until about mid 2008 countries were generally all tracking each other closely which very simplistically to me suggests that the risk of country default (out and out default or default by inflation) was seen to be similar. How quickly the bond market can lose confidence and force a country to head to the International Monetary Fund (IMF). Obviously we all know Greece’s bond yields have gone vertical forcing them to be the first. I however don’t think they will be the last. Is Portugal next?

Will the UK get the same treatment? If whichever government gets elected this week doesn’t seriously attend to the deficit quickly I can’t see why we should be excluded from the IMF party.

As always do your own research.

- All yields are month end

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