PIGS in Europe have too much debt

WHAT is it about PIGS that draws human attention? Last year, there was Obama’s reference to Sarah Palin as ‘putting lipstick on a pig.’ Notwithstanding the unkind metaphor, I voted for Sarah because not only did she have more sense and guts than Obama, she is a babe and I refer not to the PIG with the same name. Then, the swine flu broke out creating mass human hysteria. Certainly, PIGS can wear lipstick and PIGS can have the flu. But how can PIGS have too much debt? It’s actually PIIGS not PIGS: Portugal, Italy, Ireland, Greece and Spain. All of these European countries have one thing in common.

 They all have accumulated too much debt and will not be able to repay their loans. Sovereign bankruptcy is not something new. Mexico, Ecuador, Russian and Argentina have all declared themselves bankrupt in the past & turned their backs on the country’s debts. Foreign banks and creditors were left holding the bag unable to collect. Let’s look at the situation of Greece. Its debt to GDP (income) ratio is 113%. Its annual Gross Domestic Product or income is about E300 billion. But Greece has accumulated debt of E339 billion. About E25 billion of short term debt is about to come due. Greece doesn’t have E25 billion of cash to pay the maturing debt. This means it has to go out and borrow more money by issuing more IOU’s to get new debt to refinance maturing debt. The problem is that investors may no longer be interested to purchase Greece’s IOU’s because it’s clear that the country has too much debt compared to its income so it is certain that Greece has no ability to repay its debts. If creditors will not lend new money to Greece, it will have to declare bankruptcy because it cannot pay maturing debt. Portugal is in a slightly better position than Greece with 65% debt to GDP ratio but that is a very bad debt to income ratio. Italy is at 105% and Spain is at 50%. The United States is currently at 10% but estimated to be at 40% this year and 60% next year with Obama’s limitless spending of money that we do not have.

The alternative to Greece declaring bankruptcy is the ‘B’ word: Bail out. That means the richer countries in Europe must give money to Greece and the other PIGS so they can pay off maturing debt while the PIGS drastically cut down on spending. This is easier said than done. Germans may balk at the idea of giving money to the Greeks who created their own debt problems with undisciplined deficit spending. Germans make the luxury cars, Benzes and Beamers that the whole world wants and they don’t spend more than they make. Sure, the Germans have the money for bailing out Greece but will they want to do it? Should they be their brother’s keeper? Then again, as we have seen here in the United States, bail out is not a one stop shop. After Greece is bailed out, there is still Portugal, Italy, Ireland and Spain that may need bailing out too.

On a personal level, measure your own debt to income ratio. Unless you have a rich parent who will bail you out of accumulated debt, you will have to discipline yourself by having a lifestyle that has no debt or an acceptable debt to income ratio. You have seen in Greece that a debt to income ratio of over 100% means that you are indeed bankrupt. To illustrate, if your annual gross household income is $70,000 and have $78,000 of credit card debt, your debt to income ratio is the same as Greece. No matter what you say or how you justify yourself, the fact is, you are bankrupt. Just like Greece, you have only two alternatives. Have someone bail you out, or file for a bankruptcy discharge of your debts so you can start fresh again, without debt.

www.asianjournal.com )