The European Debt Crisis (PIIGS) — Countries Can Go Bankrupt Too
It's not only companies that go bankrupt. In Europe in 2010, "a country's debt" became the problem, shaking the entire eurozone.
PIIGS and the Start of the Crisis
In late 2009, the crisis began when it came to light that Greece had been reporting its fiscal deficit as smaller than it actually was. Investors lost trust in Greek government bonds, and government bond yields (the government's borrowing cost) soared.
Soon the fiscally weak Portugal, Ireland, Italy, Greece, and Spain came under scrutiny, and the term "PIIGS," formed from their initials, was used.
A Chain of Bailouts
On May 2, 2010, the IMF and the eurozone agreed on a first bailout for Greece of about 110 billion euros. Ireland then received a rescue package of about 85 billion euros in November 2010, and Portugal about 78 billion euros in May 2011. Greece had to receive a second bailout of about 130 billion euros in March 2012.
Because countries sharing the euro could not print their own currency to get through the crisis, the structural weakness of a crisis spreading easily from one country to another was exposed.
Bailout sizes may vary slightly by source, so they are noted as approximate. The key point is the vulnerability created by "a single currency (the euro) and differing fiscal policies."
The Implication for Investors
Government bonds are often called "the safest asset," but the risk varies greatly with the fiscal condition of the issuing country. The bonds of a fiscally unsound country carry higher yields but also a greater risk of not being repaid.
This crisis also shows that "it is hard to know in advance where a crisis will spread from and to." Rather than piling assets into a specific country, dividing across regions, currencies, and assets — international diversification — is the reason it reduces risk.
よくある質問
Q. Why couldn't Greece solve it on its own?
Because Greece uses the euro, it was hard to independently issue currency or adjust its exchange rate to restore competitiveness. This structure of "one currency but separate fiscal policies" was one of the core causes of the eurozone crisis.
Q. Can advanced-economy government bonds be risky too?
There are differences in degree, but no government bond is completely risk-free. Risk varies with fiscal soundness, the ability to issue currency, and credit rating. Rather than declaring "government bonds = absolutely safe," an attitude of also looking at the condition of the issuer is needed.
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