Our Opinion: 2015

Return of the PIGS

I am currently visiting clients in Lisbon, Portugal. Whilst the weekend’s events in Greece has sent shock waves throughout global financial markets, the PIGS have been by far the worst affected.

We have not heard a lot recently about the PIGS economies – Portugal, Italy, Greece and Spain. Most of Europe has been recovering so everyone’s focus is on Greece.

I believe we will now have a revived focus on Europe’s PIGS.

The weekend’s announcements led UK stocks to fall around 2% on its first day of trade. European stocks fell by an average of 4%. Here in Portugal, it fell almost 6% on open and down a further 1% today. Italy and Spain faced similar losses. The Athens stock market is, of course, closed.

Contagion was seen in the bond markets too, with Spanish and Italian 10-year bond yields rising around 18 basis points, while the German equivalent fell 15 points; a spread widening of around a third of a percentage point. The euro also continued its slide.

Whilst the Greek Government has said that the weekend’s referendum is nothing to do with continued membership of the Euro, other European leaders have made clear that it is. So we have the spectacle of the Prime Minister, Alexis Tsipras, arguing both against the bailout and for remaining inside the Eurozone.

It is also a vote on whether there is any chance of Greek banks re-opening as normal any time soon. There is no chance that the European Central Bank will re-start its Emergency Liquidity Assistance, unless Greeks approve the EU’s austerity plans.

In Athens, the Syriza government detests the bailout offer – for the way it pushes up VAT and cuts pensions.

The Greek people are torn between rejecting the EU’s plans, declaring itself bankrupt and starting again with a new currency and all the risks that go with it. Or committing to driving down living standards still further, and for a considerable time, in an attempt to re-pay its debts.

Given how messy all this is, no one should be remotely surprised that stock markets have cracked, and that borrowing costs for the Eurozone’s weaker economies – such as Italy, Spain and Portugal – have all risen. The BBC’s Robert Peston said this is “because Greece is now staring into something of a financial and economic abyss.”

A no vote would presumably see Greek banks subject to restrictions on cash withdrawals and international transfers for the indefinite future.

The country will be heading towards the euro door marked “exit”, even though such a door was never supposed to exist, let alone be opened.

At that historic juncture, the euro would no longer be viewed as a proper, permanent single currency for most of Europe.

t would be transformed into a currency peg: the currencies of Spain, Portugal, Italy and the rest might all be called “the euro”, but they would once again be perceived as domestic currencies, pegged to a benchmark Eurozone currency.

Investors would realise that if the going for any weaker Eurozone economy got too tough, well that economy could devalue by abandoning the euro. So at that point, investors would increase what they charge the likes of Spain, Portugal and Italy to borrow, to cover the risks.

That, in turn, would undermine the economic convergence so vital to the long-term sustainability of the euro.

So, whilst this week’s focus is clearly on Greece, a vote against austerity this weekend would mean markets begin to look closely at the risks here in Portugal, as well as in Italy and Spain too.

Our strategic partner, UBS, continues to support European equities. However, the gulf between the economic fundamentals in PIGS, compared to the rest of Europe, mean that the long-term viability of the Eurozone project is at risk.

Those risks and opportunities should be at the forefront of investment planning for all our European clients.