Lipstick on PIIGS

Lipstick on a pig” is an expression conveying a message that making superficial or cosmetic changes is a futile attempt to disguise the true nature of a product.

18 August 2016

There have been many claims as to who first used the term but regardless, a fitting example is the TV advertisement of early 2002 when brokerage firm Charles Schwab, attempting to expose certain competitor Wall Street firms’ conflicts of interest, showed an unidentified sales manager telling his salesmen, “Let’s put some lipstick on this pig!

That bastion of market integrity, the European Central Bank, has been doing the same thing for a few years now in respect of the PIIGS, the acronym introduced during the financial crisis for Portugal, Italy, Ireland, Greece and Spain, the southern European economies whose main common denominator was exposed as unsustainable debt level, debt that had accumulated after decades of bad investments, lax controls and accounting fraud.

€Billions of tax-payer funded loans have been poured into these economies by the ECB directly and via the IMF and a rafter of further European acronyms’, such as the European Financial Stabilisation Mechanism (EFSM), and the European Financial Stability Facility (EFSF) plus the ECB’s latest wheeze, Outright Monetary Transactions (OMT.)

But all that this additional debt has achieved is to delay the day of reckoning and guarantee that the inevitable bursting of the debt bubble will be far worse than if they had let nature take its course six-years ago.

Within our weekly “Investment Markets Overview” comment was made recently in respect of Italy’s non-performing loans and its public debt, now running at a respective 20% and 130% of the country’s GDP, yet 10-year Italian bond yields offer just a little over 1% pa.

This may be about to change, however, as the interest-rate cycle appears to be on the turn. As an example we show the 10-year yield for Portugal’s sovereign debt, a “pig” that also has 130% public debt to GDP but which, when added to Portuguese personal debt, jumps to 380% of GDP:

18 August 2016 2

After the yield –spike to 16% in 2012, the 10-year collapsed to 1.68% as of late March 2015, since when it has nearly doubled to 2.95% despite the ECB’s ongoing delusion that they control the rate.

A simple over-lay of a Fibonacci re-tracement tool shows the typical 38.2% – 61.8% target-zone for where yields may be heading, which are at 7% to 10.3%, high enough for things to get very ugly for creditors and indeed for the “PIIGS” themselves, despite the smattering of lipstick administered.

Pig photo courtesy of blogs.plos.org

 

 

 

 

 

 

 

 

 

 

 

 

 

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