Forget The PIIGS: Now It's About The FIGS

by: Carlos X. Alexandre

I get the PIIGS acronym and the implied meaning, but going forward, and having run out of food, the PIIGS will eat the FIGS – France, Italy, Germany and Spain. And yes, I know there’s an overlap, but cannibalism is also an option. In short, the FIGS are ripe for the picking, and the question is whether someone will harvest them up before they fall off the tree and rot away. Now there’s talk that the European Central Bank will lend money to the IMF, which in turn will lend to the euro members. Yet another inspiring idea designed to soothe the markets and achieve nothing.

Italy is certainly the talk of the town, but failed to add clarity to the economic landscape when it didn't issue the usual preliminary GDP data for the third quarter because a “series of revisions were being drawn up to previous data and this procedure had prevented the calculation of its customary preliminary estimate for the third quarter,” as reported by Bloomberg. And as Reuters pointed out, “French banks are among the biggest holders of Italy's 1.8 trillion euro public debt pile,” while providing a clearer time table on Italy’s debt.

Italy may struggle through to the end of the year even with bond yields at current elevated levels, but after that investors would likely take fright with big redemptions due in the spring, meaning outside help would be needed to prevent default.

France’s AAA credit rating topic continues to surface, and Spiegel Online, a German publication, summarized the French condition.

The country's financial data indicate a loss of its AAA mark is likely in the not-too-distant future - something that would spell yet more bad news for Europe.

The Guardian also had an article titled ,“Debts in France threaten top credit rating.”

Analysts said the overall health of the French economy ranked only one place above Italy, and below several countries often mentioned as being near to bankruptcy, including Spain and Ireland.

But Jean-Claude Juncker, Luxembourg’s Prime Minister and President of the Eurogroup, delivered a fresh perspective on Wednesday, when he stated that Germany's debt is a cause for concern and is larger than Spain’s, according to CNBC.

"Germany has higher debts than Spain," he added. "The only thing is that here (in Germany) no one wants to know about that."

It’s true. The debt to GDP ratio is higher in Germany (83.2%) than in France (81.7%) or Spain (60.1%), although the ratio is less important than the ability to service the debt. But if France, Italy, Spain, Portugal, Greece and Ireland, to name a few, are implementing austerity measures, where will the money come from to service the debt? It’s no secret that Mr. Juncker has never been a big fan of Germany’s policies, and Spiegel Online provided a report over one year ago.

In the past, Juncker has made comments wary of Germany's European economic policies. "That in Germany federal and local authorities are slowly losing sight of European public good, that does worry me," Juncker told the newspaper Rheinischer Merkur last month.

But maybe Mr. Juncker’s remarks are not that far off the target, and the markets may be catching on to his message. German bonds have come into focus as well, and, as the Financial Times reported on November 16, a two-year German bond issue was surprisingly weak, and usually there’s a surplus of bids, especially for short-term issues. The tide may be changing.

Frankfurt’s Xetra Dax dropped 1.2% to 5,863.21 after an auction of two-year German Bunds showed weaker than expected demand for German government debt as total bids were less than the debt on offer.

That’s in contrast the demand for a 10-year bond sale on September 21, when the yield fell below 2% for the first time ever, as reported by CNBC.

Germany sold 4.188 billion euros of 10-year government bonds on Wednesday in an auction that attracted greater demand than at a previous sale and sent borrowing costs to a record low in the category.

Spain will hold elections this weekend, which will turn out to be much ado about nothing. After all, the political replacement game hasn’t delivered any solutions thus far. Furthermore, Spain’s Finance Minister Elena Salgado shared with us that the Spanish economy will grow 0.8% this year, down from the 1.3% forecast delivered in August, and “it’s too early to know if the regions will meet their deficit goal this year,” according to Bloomberg.

But shortly before Silvio Berlusconi said goodbye, the Italian government approved a new austerity plan, soothing the markets for the time being. But what are the plans? Bloomberg shed light on the issue.

The austerity measures passed by the Senate today include a pledge to raise 15 billion euros from real-estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and a gradual reduction in government ownership of local services.

For the record, the Portuguese government sold a ton of assets as it was getting ready to qualify for the euro at the turn of the century. The problem turned out to be that they ran out of stuff to sell as the years went by. In addition, the most interesting development in my view came courtesy of the “troika” – European Commission, International Monetary Fund and European Central Bank.

According to the Portuguese publication Economico – and I translate - the “troika” stated in a communiqué to the Portuguese government that the private sector "must" lower salaries and follow the example set by the public sector. I understand the point in terms of competitiveness, but I’m at a loss as to how a government can implement such measures, short of nationalizing the private sector. Did Karl just came back to life?

But that is not all. The Telegraph published an article titled “Germany's secret plans to derail a British referendum on the EU.” The interesting excerpt follows:

The six-page German foreign ministry paper sets out plans for the creation of a European Monetary Fund with a transfer of sovereignty away from member states. The fund will have the power to take ailing countries into receivership and run their economies.

I’m not sure how Germany plans to pass such an ambitious plan, when it has been proven that sovereignty will not be given up by anyone, regardless of financial condition. Maybe they can nationalize the nations. But back to the FIGS and how the fruit’s shape is perfect in this context: Bottom heavy with debt, and a very thin top representative of virtually non-existent workable ideas and options.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.