Will PIGS Fly?

Reporter: “So Shaq, have you been to The Parthenon?”

Shaquille O’Neill: “No, I’ve been staying out of the clubs to focus on my game.”

It would be easy to make fun of Shaq over his lack of knowledge of European History. He seems particularly uninterested in the traditions and folklore of Ancient Athens. Give the modern Hellenic economy two more years; and he may be far from the only person who could care less about crumbling buildings and forgotten heritage. Soon concern for the wellbeing of the Greek Nation could become as uncommon as the individual who learns passages from Milton’s Aereopagitica by heart.

This is similarly true of all four countries that comprise the so-called PIGS: Portugal, Italy, Greece and Spain. All four nations are Southern European nations that are long on cultural tradition and history, but short on modern leadership and economic productivity. They all four seemingly bank on their past while wasting their present and spending away their futures to enjoy the fleeting moments before some apocryphal reckoning.

Each nation currently runs a very high ratio of debt to Gross Domestic Product. Economics Professor Gary North describes the current state of play in Greece and Spain.

Greece is running a huge deficit in the range of 12.7% of its Gross Domestic Product. The investment world regards a deficit of this magnitude as unsustainable. There are rumors of default. Spain is running a deficit of 11.4% of its GDP. This is considered a threat to the nation’s financial structure. There are rumors of default.

This is similar to the current level of fiscal enstupidation in the Good Ol’ US of A. We currently run 11.4% of our GDP in debt and are on the Drunkard’s Reel to continue doing so at least until 2020. Then our entitlement programs begin to become significantly more expensive than they are right now. At that point we’ll also owe more than twice as much interest on our outstanding T-Bill float as we do now as well.

However, the PIGS have troubles that Sam’s Republic doesn’t. They have joined a currency union with most the rest of Western Europe, and thereby are joined to these other nations at the hip via the Euro currency. This served all four of them well when they got to borrow credit-worthiness from France, Germany and Holland as they accessed more affluent capital markets in Northern Europe.

Now, however, the waiter hovers angrily over the table as each of the PIGS stares incredulously at the Visa Bill. They signed on to the agreement, upon entering the Euro Zone, that they would run deficits no greater than 3% of GDP. Now the Germans, still recovering from having to resurrect East Germany, are particularly angry that these four nations have freeloaded on the good reputation of the Bund, and apparently have no political will to make their citizens abide by the agreement the politicians signed.

This also puts Germany, France and ultimately China on the horns of a bad dilemma. The Greek Government went through the Kabuki Show of threatening to cut government services and entitlements. That government’s tax collectors went on strike. Yep, Alibaba.com reports what is too crazy for me to make up.

Greek tax officials walked off the job on Thursday, kicking off a series of strikes against an austerity plan meant to pull the country out of a debt crisis that has sent shockwaves across the euro zone. The plan, which won the European Commission’s qualified backing on Wednesday, includes a wage freeze across the public sector and cuts in special allowances that make up a big chunk of civil servants’ overall income.

Predictably, holders of Hellenic Bonds are not happy campers. They can’t do much about the rapage they could endure if their current portfolios thereof were to collapse. Greece conceivably could just take a walk on those bonds and declare them frozen or dishonored.

Thus, previous customers won’t touch Hellenic Bonds without lots of insurance against sovereign default in the form of Credit Default Spreads. This makes it increasingly more expensive in terms of collateral for Greece to continue deficit finance for its national expenditures. The Guardian UK reports on the CDS market for Greek Treasury Securities.

Greece’s borrowing costs spiked on Thursday because of market jitters over its ballooning budget deficit, as the prime minister said the country faced an unprecedented crisis. Greek government bond spreads over benchmark German Bunds, a measure of the risk which investors see in holding Greek debt, jumped to their highest level since Greece joined the euro currency area in 2001, traders said.

All of this lands hard in Germany’s lap. When a person owes the bank $50K, the bank owns them if they don’t pay. If the same person owes another bank $50B, they may well kill the bank if they don’t pay. The entire Euro Zone could suffer if they send Greece to some form of international Debtor’s Prison. Yet nobody will care about the rules on public debt if Greece gets bailout consideration just to prevent a colossal Euro trainwreck.

All of which reminds me China holds around $2T of American government debt. Some in China have demanded that the Chinese financial community sell all of this debt and crater the US Treasury’s credit rating as a form of national repudiation of the American Government. They do this in response to American policy makers who speak openly of weakening the US Dollar while we continue selling Taiwan advanced military hardware.

From China’s point of view, a return of the inflated Jimmy Carter Dollar would spell economic disaster for the Chinese people. Progressive Economist Brad DeLong asked Fed Chairman Ben Bernanke why he wouldn’t adopt a 3% annual inflation target. What Bernanke should have asked DeLong is why if he did that China wouldn’t aggressively arm, train and bankroll Al Qaida.

A 3% annual inflation policy would trim the Chinese US T-Bill holdings at a rate of 3% as well. That would be a $60B penalty against China the first year it was adopted. Ceteris paribus, a $2T T-Bill float decremented at a constant rate of 3% a year for a decade, would hold a real value of $1.47T. “You can not, you shall not, you will not crucify my kind on a cross of gold!”

Dr. DeLong recommends that we wank off on 26% of our national debt over the next ten years. Under DeLong’s solipsistic schlock scenario, the ‘Murican People will tell our bondholders the same thing we told the Iraqi Kurds in 1992. “You screwed up. You trusted us.”

Thus, like the inflatable pink pig Pink Floyd set adrift above Versailles Palace, the Europeans face an embarrassing dilemma over PIGS On The Wing. It becomes a test case for how the world’s creditor nations can or will handle recalcitrant debtors who refuse to stop borrowing or even pay off what they owe.

Perhaps Robert Gibbs can jot a few notes on his hand while he watches. US debt to GDP ratio is the same as Spain’s. China sits in a similar position to Germany’s when they look at their debt holdings. Hopefully, a 3% annual inflation target isn’t going to make the Hopey-Changey List. A war between the United States and mainland China is not a conflict that anyone on the face of the planet would really win.