Global Investing

Ireland's fall from grace has been rapid and far worse than that of its counterparts, even Greece. But life in the euro zone has still been one of profound growth, as it has for most of the other peripheral economies.

Take a look first at the progress of  PIGS (Portugal, Ireland, Greece and Spain) GDP since 2007 when the global financial crisis took hold. In straight comparisons (ie, rebased to the  same point) Ireland is far and away the biggest loser. Portugal is basically where it was.

But now take the rebasing back to roughly the time that the euro zone came together.  First, it shows that Ireland's fall is from a very high place. The decade has still been one of profound improvement in cumulative GDP even with the last few years' misery. But it is front loaded.

Perhaps most interesting, however, is what the second graph (courtesy Reuters' Scott Barber) says about the PIGS and the euro experiment.  Despite major financial and market crises, Greece, Spain and Ireland have all seen their economies accumulate at a higher rate than the euro zone average.  Only Portugal has been below average -- a perennial slow grower.

Could any of this outperformance  have been attained outside the euro zone? Probably not. But the question now is whether the current troubles are going to wipe out everything that has been achieved.

Given the ubiquity of BRICs and PIGS, it seems everyone else in the financial and business world is attempting to conjure up catchy acronyms to group economies with similar traits. All with varying degrees of success.

HSBC chief Michael Geogehan has been championing ‘CIVETS‘ to describe Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa as the next tier of developing economies poised for spectacular growth.

Evoking the skunk-like animal blamed for the spread of the deadly SARS outbreak in Asia is not exactly auspicious but then it will probably be less offensive than the porcine moniker for Portugal, Italy, Greece and Spain. The collective term — with permutations such as PIIGGS to include Ireland and Great Britain among the list of debt-ridden countries — has been denounced by politicians in Portugal and Spain.

Central banks in debt-strapped countries have a golden opportunity ahead of them, if you will excuse the pun, to help their countries' finances by selling their yellow metal holdings.

At least, that is the message that Royal Bank of Scotland's commodities chief Nick Moore has been giving in recent presentations -- and he thinks it might happen.   The gist is that gold is now at a record price but banks have not come close to  meeting their sales allowance for the year.

Under the Central Bank Gold Agreement there is a quota of 400 tonnes that can be sold by central banks within a 12 month period and with only about three months to go in the latest period less than 39 tonnes has been sold.  At today's price that remaining 361 tonnes is worth some $14 billion.

Now that markets appear to have decided that a $1 trillion stabilisation package from the European Union is enough to soothe global nerves and ward off a sovereign debt crisis, emerging market sovereigns and corporates may start to issue bonds again.

Emerging market debt issuance was heading for a bumper year — at more than $100 billion issued so far — before investors started to fear an imminent default by Greece and markets froze up.  

But a return this week in emerging sovereign debt spreads below the psychologically key threshold of 300 basis points over U.S. Treasuries is likely to encourage issuers back again.

They finally realised how serious it was. With stock markets tumbling, bond yields on vulnerable debt blowing out and the euro in danger of failing its first big stress test,  the European Union and International Monetary Fund came out with a huge rescue plan.

At 750 billion euros (500 billion from the EU; 250 billion from the IMF), the rescue package is the equivalent of taking a huge mallet to a loose tent peg.  Add to that an agreement among central banks to help out and the actual purchase of euro zone bonds by Europe's central banks and you turn the mallet into a pile driver.

That tent is not going anywhere for now.

Does this remind anyone of anything? How about a lot of small attempts to stop the subprime/Lehman crisis failing, only to be followed by the  likes of the $700 billion Troubled Asset Relief Program in the United States?

There is no question that the losses on stock markets at the moment are primarily the result of the Greek crisis. A downgrade of a euro zone country’s sovereign debt to junk is enough to make all but insane mainstream investors take a large step away from risk.

But could it also be that the Greek crisis has come at a time when big investors were looking for an excuse to cool down the equity rally? MSCI’s all-country world stock index hit a peak on April 15 that was not only higher than anything seen this year, but also last year as well.  Up about 85 percent from its March 2009 lows, in fact.

Partly as a result, there were some signs emerging that suggested a correction would soon be in the works.

Greece's decision to ask for help from its European Union partners and the International Monetary Fund has triggered a new wave of notes on where the country's debt crisis stands and what will happen next. For the most part, they have managed to avoid groan-inducing headlines referencing marathons, tragedies, Hellas having no fury or even Big Fat Greek Defaults.

Perhaps this is because the latest reports are pointed. They focus on the need to solve the Greek debt crisis before it spreads to bring down others and even shake Europe's monetary framework loose.

Barclays Capital reckons the 45 billion euros or so of aid Greece is being promised is a drop in the bucket and that twice that will be needed in a multi-year package. JPMorgan Asset Management, meanwhile, says that to bring its 130 percent debt to GDP ratio under control Greece will need the largest three-year fiscal adjustment in recent history.

In an unfortunate turn of phrase at the height of his country's current debt crisis, Greek Finance Minister George Papaconstantinou on Monday compared his government's Herculean task in slashing deficits and debts as akin to changing the course of the Titanic. Sadly, we all know where the great "unsinkable" ended up almost a century ago and I'm sure,  given the chance, Mr Papaconstantinou would have chosen another metaphor. But if the Greek economy (or perhaps the euro zone at large?) is to be cast as the Titanic, then what is its potential iceberg?

For some euro politicians, look no further than the sovereign Credit Default Swaps market. France's finance chief Christine Lagarde said as much last week when she questioned "the validity, solidity of CDSs on sovereign risk" and warned speculators to be careful as regulators took a "second look" at the market and European governments closed ranks. Lagarde, of course, is not alone.  You can be sure CDS are being examined long and hard by Spanish intelligence services investigating the "murky manoeuvres" in the debt markets.  But what is the exact charge against CDS?

CDS are ways to buy or sell insurance on the risk of debt defaults without needing to own the underlying bonds in the first place. It's a way of hedging your debts, if you like, without having to go through the often more complicated game of selling securities short (or selling borrowed paper). In essence, it allows you to take a bet on default without having to go to the trouble of owning the bonds you're insuring against.  Some critics, not unreasonably, would view this as the epitome of the casino capitalism that has elicited so much public outrage over the past three years . The fear is this market has become the tail wagging the dog.

The crisis of confidence in Greece's fiscal health has dented U.S. equities, though not enough to compromise a budding American economic recovery. Even a significant slowdown in European growth prospects might have limited immediate impact on the United States. However, that benign backdrop could vanish, economists at Morgan Stanley say, if the Greek situation were to turn in to an outright credit crisis.  They call it the "contagion tail risk":

While the retreat in risky assets in the past few weeks is not yet a headwind for growth, it is hardly a plus.  If the crisis spills over into broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime crisis — the consequences could be more dire.

JP Morgan, for its part, notes that it's not just Greece investors need to worry about.

As rare as it is to get any two economists to agree, the chances are even slimmer of hearing three Nobel economics laureates concur.

And so it was that each of the award winning economists -- Eric Maskin (2007), Michael Spence (2001) and Robert Merton(1997) -- all had their own take on the legacy of three years of financial and economic crises when they spoke to a conference organised by Pioneer Investments  in London last week.

 To be fair, they broadly coagulated around the inevitability of greater regulation of banking and finance and also on the enormity of China's now imposing position in world economic affairs.