From The Outside In – PIIGS Update

When markets unravel big-time, the weakness almost always starts on the outside and moves inward towards the center.  We refer to this phenomenon using the phrase “from the outside in.”  For more of my thoughts on this concept, listen to my February 2009 podcast, also titled From The Outside In.

I’ve been keeping one eye on Greece’s debt situation for awhile because it fits the pattern…a weaker state begins to fail, the contagion spreads, and the next thing you know, the world financial markets are in a tailspin.  At least that’s the potential.

Back in December, there were fresh signs of trouble from Greece (ever the European poster child of fiscal trouble), and a year before that, Ireland was giving off warning signs, but now the contagion has apparently spread to the so-called PIIGS (like BRICs, only involving Portugal, Ireland, Italy, Greece, and Spain). 

LONDON (MarketWatch) — The cost of insuring Spanish and Portuguese government debt against default via credit default swaps hit new records Monday, while the cost of insurance for Greek debt also rose, according to CMA DataVision. The spread on five-year Portuguese credit default swaps rose from 227 basis points late Friday to a record 244.06 basis points Monday. That means it would cost $244,060 a year to insure $10 million of Portuguese government debt against default for five years. The five-year Spanish CDS spread rose to a record 172.9 basis points from 166.5 late Friday. The Greek CDS spread widened to 426 basis points from 407.5 Friday.

(Source)

The truth of the matter is that nearly all Western governments, plus Japan, are completely and utterly insolvent.

(Source) 

Note: “Off-balance-sheet” liabilities are mainly unfunded pensions and entitlement programs.

While I respect the massive efforts recently made by various world governments and central banks to “solve” the problem of a credit bubble bust by lowering interest rates to multigenerational lows (and an all-time low for the Bank of England, in a data series that stretches back to 1694), the worry comes when we note that credit defaults are still increasing.