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How Will the Pigs Affect Our Economy

 

Am I really talking about PIGS in relationship to the economy? Yes and no. PIGS stand for Portugal, Italy, Greece, and Spain. Five or even three years ago, most of us didn’t think about these countries. Today, they are all over the news – particularly Greece. For the sixth time in 150 years, Greece will default on their national debt. The concern in the United States is this will mean a double dip recession. I don’t believe it will.

A double dip recession is, and will continue, to affect Europe. But, I do not think the United States’ Gross Domestic Product (GDP) will feel a drastic impact.

Only 12 percent of our GDP is exports. Further, only 1.9 percent of our GDP is exported to the Euro zone. Country wide, this is not a huge concern. Yet, for companies which deal primarily in European exports, the concern is a very real.

What is happening with Greece and the European banking system? First, when a country defaults on its national debt it is different than when an individual does. If an individual defaults on a loan, it marks their credit score and they have future problems getting credit. Historically, when a country defaults, it wipes the slate clean and they look a lot healthier. They are then able to go back to the market and borrow again.

But, what does this mean for the banks which are owed money? Greece, like nearly all countries, borrowed money in the form of bonds. The current negotiations will determine how many cents on the Euro bondholders will receive. Unlike in 2008, when many banks in many countries worldwide owned Derivative Securities like Collateralized Debt Obligations (CDOs, like subprime mortgage obligations) called toxic assets, most of the debt on which Greece is defaulting is held within European banks. Thus, Europe will feel a greater impact.

 

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I want to hear your opinions; please leave a comment below and let me know your thoughts.

 

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