Forget Cyprus, Because Europe Is PIGSIC!

Published in Investing on 28 June 2012

As Cyprus begs for a euro-bailout, should we panic about Europe's six sick states?

On 12 June, I wrote to the Fool editors about the eurozone crisis, warning: "Cyprus [is] an island often overlooked, but now on the brink of collapse."

Sure enough, the beautiful Mediterranean isle (population: one million, with a Communist president) is now begging for a bailout from its partners in the European common currency.

Oh no, not another bailout

Just like big brother Greece, Cyprus is struggling to cope with a weak economy and broken banks. In fact, its two largest banks -- Bank of Cyprus and Popular Bank -- both need urgent injections of capital in order to plug multi-billion-euro shortfalls in their regulatory capital.

As a result, Cyprus has become the fifth member of the eurozone to seek emergency funding by asking for help from its currency colleagues on Monday.

Although Cyprus is a tiny state (it is the third-smallest economy in the eurozone, after Estonia and Malta), its bailout will be large in relative terms. Some pundits reckon that any rescue package could total €10 billion -- more than half of the island's GDP (Gross Domestic Product, or total national output) of €18 billion.

Even so, €10 billion is pocket change compared to the five previous euro bailouts. For the record, Ireland received €85 billion in November 2010, Portugal got €78 billion in May 2011, Greece got €110 billion in May 2010 and another €130 billion in March 2012, and Spain asked to borrow up to €100 billion earlier this month.

Six sick states

Since 2010, I've been monitoring what I call the 'six sick states' of Europe. Recently, I relabelled these ailing economies as PIGSIC ('pig sick'), being an acronym for their six names: Portugal, Ireland, Greece, Spain, Italy and Cyprus.

Although these six PIGSIC states are nowhere near as healthy as the eurozone's two biggest economies (Germany and France), some are sicker than others. To demonstrate each nation's individual weaknesses, I've pulled together some scary statistics on the economies of these six sick states, with the help of the Wall Street Journal. Here they are:

1. Projected GDP in 2012

When it comes to financial crises, bigger economies usually ride out the waves better than smaller states. Here are the forecast GDPs of the PIGSIC states this year, from largest to smallest:

PIGSIC state2012 GDP (€bn)

As you can see, Italy and Spain are the largest economies of my PIGSIC candidates. Indeed, the combined GDP of Greece, Portugal, Ireland and Cyprus come to €548 billion, which is little more than half of Spain's GDP. Hence, the bailouts of these four countries will be as nothing compared to the size of any future bailout of Spain and/or Italy.

2. Growth in 2013

My next table shows estimated GDP growth in 2013, sorted from highest to lowest:

PIGSIC stateGDP growth 2013

As you can see, Ireland is the only economy expected to grow strongly next year. The others are forecast to see feeble growth of 0.3% to 0.4%, apart from Spain. The Spanish economy is expected to keep on shrinking well into 2013, with GDP expected to fall by 0.3% next year.

3. Debt/GDP ratio (end-2011)

Now let's see which of the PIGSIC countries are most heavily indebted in relation to the size of their economies. To do this, we divide government debt by GDP (table sorted from highest to lowest debt/GDP ratio):

PIGSIC stateDebt/GDP ratio (2012)

As you can see, the PIGSIC state most over-burdened by debt is Greece, with government debt 1.65 times the size of its economy. To me, this indicates that Greece is a dead duck, regardless of any new bailout terms agreed with the EU.

Italy (at 120%), Ireland and Portugal (both around 108%) all have debts greater than their GDPs -- and any ratio above 100% looks like a big red warning flag to me. In contrast, Cyprus (72%) and Spain (69%) are less heavily indebted than the powerhouse of Europe, Germany (81.2%).

Alas, Spain is set to borrow up to another €100 billion to bail out its ailing banks, thus pushing up its debt/GDP ratio by as much as 10%.

4. Budget deficit (projections for 2012)

Which of the PIGSIC economies spend more than they collect in taxes and then borrow these shortfalls? Let's find out by comparing their budget deficits (sorted from highest to lowest projected deficit for 2012):

PIGSIC stateBudget deficit (% of GDP)

As you can see, Ireland, Greece and Spain are in a horrible mess, borrowing between 8.3% and 6.4% of their economy this year to finance public spending. Countries already deep in debt that over-spend while paying high rates of interest on new debts are simply digging themselves deeper and deeper into debt.

At the other end of this scale, the only country to have a budget deficit below the 3% target agreed by the eurozone is Italy, which is forecast to overspend by 2% of GDP this year.

5. Unemployment (March 2012)

Now let's find out about joblessness in the PIGSIC states, using March 2012 unemployment rates (sorted from highest to lowest):

PIGSIC stateUnemployment rate

As you can see, almost one in four adults in Spain is out of work, thanks to an unemployment rate exceeding 24%. Greece is hardly better at nearly 22%, while joblessness in Portugal and Ireland is around 15%. In comparison, Cyprus and Italy have unemployment rates of around 10%, versus 8.2% here in the UK.

Clearly, paying benefits to huge numbers of unemployed adults will place a huge strain on the budgets of these countries, particularly Spain, Greece and Portugal.

6. Bond yields (10-year)

Finally, let's find out what 'Mr Market and his bond vigilantes' think about the relative creditworthiness of the PIGSIC nations, by comparing the yields on each state's 10-year government bonds (sorted from highest to lowest):

PIGSIC state10-year bond yield

* No bonds issued since 2011

As you can see, Greek 10-year bond yields of nearly 27% suggest that another Hellenic default is highly likely. Similarly, Portuguese and Irish bonds trade at stressed levels, with yields of 10.2% and 8.2% respectively.

What's more, with their enormous government debts, there is simply no way that Spain can afford to borrow over 10 years at a fixed 7% a year, nor can Italy borrow at 6.2% a year. One way or another, Mr Market is expecting some kind of reckoning for these two large borrowers.

What do you think?

Looking at these six sets of stats, I come to the following conclusions:

1. Portugal and Ireland will both need second bailouts.

2. Greece is sure to depart the euro and then default on or restructure its debt.

3. Spain's budget deficit and borrowing costs will force it to take a second bailout, this time for the sovereign state, rather than its banks.

4. Although Italy's economy is fairly healthy, its debt burden (the third-highest in the world after the US and Japan) is crippling. Hence, it has a 50/50 chance of needing a bailout.

Then again, perhaps I'm being pessimistic and this latest EU summit (only the 20th crisis meeting!) will solve all of these problems with the wave of a magic wand. What do you think about the state of the PIGSIC nations and the EU as a whole? Please let us know in the comments box below...

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suewhistle 28 Jun 2012 , 5:53pm

Typo: "In comparison, Cyprus and Greece have unemployment rates of around 10%, versus 8.2% here in the UK."

Should be Cyprus and Italy...

Incidentally, in Italy where are some of the cuts falling? Yes, on education where us hard-pressed teachers spend all our money in the local economy...

theRealGrinch 28 Jun 2012 , 9:15pm

They should put away their begging bowls.

snikmij 29 Jun 2012 , 1:17pm

Very interesting set of facts, thanks for setting it out.

Wonder when the acronym PIGSIC will start to take on?

BrnzDrgn 29 Jun 2012 , 2:04pm

Poor Italians, I will be helping them out whilst there on business, the Hotel fees are covered on expenses even though they are very cheap for a good Hotel.

I am paying for my flight and food, wonder if I can get a good suit as well?

kensutton 29 Jun 2012 , 2:20pm

Where do you think the uk would be if it had joined the Euro. My guess would be between Ireland-Portugal and Greece.

Solutions. Either a radical reshaping of the Euro nations or a Bundesbank inspired central bank dictating terms to individual nations in return for new debt being issued centrally and nations being jointly responsible for this new debt.- This would be controlled by the most prudent members but benefiting everyone in terms of lower interest rates throughout Europe.

In practise the solution will contain elements of both.

Ypawa68 29 Jun 2012 , 2:22pm

UK GDP = EUR 1.9tn
UK Deficit is EUR 153bn = 8.1% (worse than Greece, Spain and Portugal)
UK Debt/GDP = 67% (slightly less than Spain)
UK Debt including bank bailouts: EUR 2.9tn (gulp)
UK Debt/GDP including bank bailouts: 161%

Spain's bank bailout is currently estimated to be EUR 100bn max, and is no longer going to be considered government debt it seems.

UK's bank bailout so far is EUR 1.5tn, 15 times more than Spain (so far) for an economy twice the size.

Lucky we pay low interest huh?

CorralSpain 30 Jun 2012 , 11:27am

No, PIGSIC is not a brilliant new term, not at all. Another variant of PIGS giving an offensive name to countries where millions live. Disguised racism.
First, using offensive terms to refer to large communities must be avoided at all times. So states the Style Guide of The Guardian; search PIGS at
Second, that name suggests the corresponding countries deserve some punishment. I may admit it in part, only in part. Where are the virtuous, then? The recovery hero of today (the US) was the origin of this mess four years ago. While true that nobody can blame others for the loans he borrowed, it's also true that the Euro system had a moral hazard on this point, as weak countries had access to extremely low rates that they, obviously, overused.

AlysonThomson 30 Jun 2012 , 12:19pm

If I were you, I wouldn;t be confident about France.
Germany is the ONLY strong country in the Euro.

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