www.UPSCPORTAL.com : (Article) PIIGS Crisis

Posted: 17 Dec 2011 02:12 AM PST

PIIGS Crisis

(Notes Useful in all Interviews conducted by UPSC; Civil Services (Exclusive): GS (CS Pre, CS Mains- India Economic Interaction with the World) & as examples in optionals like Public Administration, Sociology, Geography, Political Science etc)

The countries known collectively as the PIIGS—Portugal, Ireland, Italy, Greece, and Spain—are burdened with increasingly unsustainable levels of public and private debt. Their borrowing costs are soaring amidst loss of market access led to bailouts financed by the European Union and the International Monetary Fund.

Scenario

Greece is clearly insolvent. Even with a draconian austerity package, totaling 10 percent of gross domestic product, its public debt would rise to 160 percent of GDP.
Portugal, where growth has been stagnant for a decade, is experiencing a slow-motion fiscal train wreck that will lead to public-sector insolvency.
In Ireland and Spain, transferring the banking system's huge losses to the government's balance sheet—on top of already-escalating public debt—will eventually lead to sovereign insolvency.

"Plan A" Approach

The official approach, Plan A, has been to pretend that these economies are suffering from a liquidity crunch, not a solvency problem. The hope is that bailout loans, with fiscal austerity and structural reforms, can restore debt sustainability and market access.

Feasibility of "Plan A" Approach

But this "extend and pretend" or "lend and pray" approach is bound to fail, because most of the options that indebted countries have used in the past to extricate themselves from excessive debt are not feasible.
Approaches Available Earlier, Why Difficult to Implement?

1. Printing Money: For example, the time-honored solution of printing money and escaping debt via inflation is unavailable to the PIIGS, because they are trapped in the eurozone straitjacket. The only institution that can crank up the printing press is the European Central Bank, and it will never resort to monetization of fiscal deficits.

2. GDP Growth: Nor can we expect rapid GDP growth to save these countries. The PIIGS' debt burden is so high that robust economic performance is next to impossible. Moreover, whatever economic growth some of these countries might eventually register is contingent on enacting politically unpopular reforms that will work only in the long run—and at the cost of even more short-term pain.