And so, as expected by most, the major Western European economies are talking about what they can do to resolve Greece’s fiscal problems. Contagion has already caused anxiety to spread to the fiscally “un-sound” European nations. Specifically, the PIGS – Portugal, Ireland, Greece and Spain. PIGS is an acronym that was first used by in 2008 by journalists to refer to Portugal, Italy, Greece and Spain. All these 4 economies suffer from similar problems such as fiscal indiscipline, current account deficits, and high unemployment. However, in Pat Buchanan’s view, Ireland deserved a spot in this demeaning group more than Italy did which apparently has a stronger balance sheet that its counterparts.

Contagion

This contagion has already caused the sovereign CDS spreads of these countries to rise with investors fearing that Greece is the just the first in a line of dominos that could fall across the EU. Greece has seen its yields on government debt sky-rocketing, with its latest 5-year bond issue having a coupon of 6.1%, as investors demand more compensation for the risk they are taking by purchasing those bonds. Very soon, the other countries in the PIGS acronym could see their own yields being elevated. The higher interest costs will be of help to any of these governments as it may start a vicious cycle of rising costs and an increasing inability to service the debt burden.

However, many are of the opinion that France and Germany will not let the Greece go down because that could be the first step on the path leading to dissolution of the European Union itself. Seen in fast forward, the scenario plays out something like this. Greece is not bailed out, and due to its inability to manage its debts, it defaults. Contagion leads to fear spreading through other weak economies and they start to experience higher interests costs and pressure, which could lead to more defaults. Those countries that have defaulted will likely have little incentive to continue being a part of the EU, with Brussels imposing constraints on what kind of monetary and fiscal policies those nations can utilize.

Why not me?

To avoid even starting down that path, Greece will be bailed out, but the question is what are the un-intended consequences? Once Greece is pulled up out of the hole with the help of French and German money, the other PIGS countries will have all the right to ask, why not me? The moral hazard that accompanies such action is very often glossed over in crisis situations that demand current situations be addressed immediately before deteriorating further.

But the real problem arises when the un-intendend consequences of those actions start becoming bigger than the problems those actions were supposed to solve in the first place.

Disclosure: Long Market

Image Credit: enggul under a Creative Commons license

Disclaimer: Views and opinions expressed on above are those of the author alone and do not in any way represent the official views, positions or opinions of the employers – both past or present – of the author in question, or any other institutions and corporations associated with the author. Neither the information nor any opinions contained or expressed above and elsewhere on Young & Invested constitutes or should be construed as a solicitation or offer by Young & Invested to buy or sell any securities or other financial instruments or to provide any investment advice or recommendations. Young & Invested shall not be liable for any claims or losses of any nature, arising indirectly or directly from use of the information on or accessed through the site. Please see full disclaimers here.