How the bacon is cooking

01 December 2011
When I last wrote about the PIIGS, my view was coloured largely about the respective countries attitude to deficits. My overall views of how the countries have progressed has followed the approximate paths I envisioned, and I now see a much firmer end-game. Firstly the countries themselves:

Italy: Italy has a lot of debt, but it is all historical and mostly domestically-held. More importantly Italy has a low deficit, the levels of which were largely unaffected by the credit crunch. Somewhat ironically, Private (i.e. non-governmental) Italian debt, which is stuff like credit cards, is very low. Above all, Italy still has a reasonable diverse functioning economy, which includes a significant amount of industry. Their new technocratic government is not exactly democratic, but with no prospect of a national government, there was not exactly much alternative. I think they are safe for now, with the added bonus that they are going to be highly focused on finance, and hence not pass any constituency-pandering laws. What is good is manufacturing being a large portion of the economy.
Ireland: Ireland is basically a victim of the credit crunch, having both high private debt and the aftermath of an a housing bubble that bordered on insanity. However most of their problem was the underwriting of the entire Irish banking system, but since the Irish government does not distinguish between bailout and non-bailout spending to the same extent the UK does, it is hard to evaluate their underlying structural position.
Spain: Another fairly prudent country that got hit by a housing bubble burst. However with 10% of the economy in construction, this stings a lot harder than it does for Ireland, as all those ex-builders are dumped straight into the already-long dole queue. In addition its economy is two-third service-based, and for reasons discussed previously I consider service-based economies to be very bad.
Portugal: Portugal has been downgraded to junk status, and its mixture of austerity-fuelled industrial action coupled with historically large deficits make it looks much like the next Greece. The only vaguely mitigating factors (assuming the BBC graph is to be believed) is that it has few debtors, and a large potion of its debt is held by neighbouring Spain which has interests in not pushing Portugal over the edge. Both of these help shield Portugal from a cascade failure, but since Portugal's overspending is structural rather than induced by a property bubble, it is still right on the cliff edge.
Greece: Greece is still (just about) paying its bills, but the enforced write-down (which is what the haircuts basically are) of Greek debt is pretty much default in all but name. Even those who have grudingly accepted the haircut have demanded that the bonds be issued under English law rather than Greek law, in order to make a ~~second~~ further haircut harder. Greece is only being kept afloat because an all-out Greek default stands a good chance of causing a cascading failure of banks elsewhere in Europe, and much of it is just buying time to allow banks to get into better shape. Of course as soon as Greece does go into full-blown default, the current civil unrest may well blow into something bordering on civil war.

My current prediction is predicated on there not being a total collapse, because if that happens all bets are off and everyone is phucked. I foresee Greece and Portugal both defaulting, as I do not see the populace of these countries sustaining the cut-backs required. At the other end of the scale I think Italy will survive. That leaves Spain and Ireland, the housing bubble victims. I think Ireland will survive, as long as its creditors don't go irrationally militant, but Spain is too close to call.