The European region is getting riskier day by day because of the ballooning debts of PIGS including Ireland. It is creating a threat to EURO currency and recently EURO is declining against some major currencies like:
- EURO/CHF – Euro dropped to record low against Swiss Franc to 1.16 last week almost a drop of 100-150 Pips.
- EURO/USD – Euro is facing pressure of even against Dollar and got slide to 1.40.
- EURO/INR – Indian currency is getting stronger against EURO and trading at 62.
Why this fall in Euro currency:
The debt crisis of PIGS is clearly hurting the EURO as a currency. So we will try to study the current picture of PIGS Debt.
1) Greece
- External Debt – $532 Billion
- Debt to GDP Ratio – 142%
Here the position of Greece is very critical despite of first rescue package worth of $146 billion and then second bailout of $168 billion being shared by ECB (European Central Bank) and IMF (International Monetary fund). Its Debt to GDP ratio is second highest in the world after Japan.
2) Italy
- External Debt – $2.2 Trillion
- Debt to GDP Ratio – 119%
The Italy was not on the radar of ECB but recently the 10 year Bonds slumped and the regulators banned the naked shorting of Bonds & Equities with immediate effect. Many Italian Investment schemes which are being run by major Italian banks are on the verge to collapse due to which the equity prices of banks took a nosedive. Important point to be noted that Italy has to repay almost $500 billion to France which is roughly around 20% of French GDP.
3) Spain
- External Debt – $3 Trillion
- Debt to GDP Ratio – 60%
Spain is fairly less vulnerable compared to Greece and Italy as far as Debt to GDP ratio is concerned. But the Spanish Economy has low per capita GDP Income and the 20% Unemployment Ratio is also alarming. The big threat for Spain is from Portugal and that we will study in next point.
4) Portugal
- External Debt – $400 Billion
- Debt to GDP Ratio – 93%
The Portugese economy is a small economy and with such a high Debt to GDP ratio could lead to default for such a small economy. Moreover one-third of Portugal’s debt is held by Spain so major ratings agencies had already reduced the credit ratings of Portugal and Spain.
5) Ireland
- External Debt – $1.67 Trillion
- Debt to GDP Ratio – 96%
The Irish economy has the worst External Debt as per its size.
Above all economies showing a very gloomy picture for the whole European region because all the debt is somewhere entangled with major economies like France, Britain &Germany.
Immediate Implications:
It is very tough to predict the default because till now all are being saved by ECB & IMF but the question is Till When? All these shaky economies might have some pressure on Euro currency which are witnessing these days and this is hinting that the coming three months would be difficult for the world markets including emerging equity markets.
Some 2-3 years down the line we could see a terrible situation for France, Britain & Germany.
Possibility for Indian Markets:
Our markets are trading at around 17000-2000 range but if this 3 month period brings any bad news from these PIGS then we could easily slide down to the level of 16000-15500.
Disclaimer: In this article all the opinions and predictions are my personal and it has no relevance or connection with any of the report and views of any broking/equity research company.
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