2011: The Year of the European GIPSI?

PIIGS is truly not a flattering acronym, and can be deemed offensive and downright cruel. But the ugly acronyms don't stop there and STUPID (zerohedge.com) is yet another one that refers to another group: Spain, Turkey, U.K., Portugal, Italy, and Dubai. As a matter of fact, just about any country in Europe can be bundled into a new group, because the economic landscape across the pond is quiet dire.

It's my turn, and I now create a new, and logical, acronym — GIPSI — that actually reflects the credit risk by order of magnitude (from high to low) of the five members in the table below and is ironically appropriate, especially since French President Nicolas Sarkozy on July 28, 2010, ordered authorities to force out Gypsy illegal immigrants and dismantle their camps amid accusations that his government is racist in its treatment of the group known as Roma. Could it be that Nicolas is acting out his fantasy in a smaller scale — and wildly misdirected — since Mr. Sarkozy dreams of expelling the GIPSI from the European Union?

Country	5 Year Spread
Greece	826.18
Ireland	489.37
Portugal	387.29
Spain	222.56
Italy	176.30
Source: CMA (cmavision.com) 11/1/2010

Click to enlarge

But does it really matter which country is the weakest link? Or the order in which the debt crunch and the fallout from austerity measures will be felt? Let's remember that Europe is now a Union of sorts, aspiring to become the most powerful Federation of States on Earth, and the Euro's ambition, although misplaced and ill-designed, requires economic cohesiveness. Athos, Porthos, and Aramis, the characters created by Frenchman Alexandre Dumas, come to mind. In "The Three Musketeers" they were inseparable friends and their motto was "tous pour un, un pour tous" — "all for one, one for all." Its' not as if the U.S. federal government will let California sink because the other states don't care much for surfing! We're in this together.

Regardless of credit risk pricing as shown above, the often mentioned measuring stick is Debt/GDP. But that ratio doesn't quite tell the story, and doesn't even come close to exposing the true problem. Revenue/GDP is the ratio that brings relevance to the current European economic condition. Where the U.S. Government had a Debt/GDP ratio of 53% in 2009, Greece's ratio was 115% and France had a middle of the road number at 78%. However, The Debt/Revenue ratio for the U.S. was a monstrous 358%, while Greece had 312% and France had a paltry 161% by comparison.

But here's where the going gets tough! The French government's revenue stood at an unbelievable 48% of GDP and Greece consumed a little less, but still a high percentage at 37%. By comparison, the U.S. Revenue/GDP ratio was a miniscule 15%, although we still feel that government taxes are too high and wasteful practices don't seem to end. What does that mean? Despite the negative economic impact, the U.S. government can raise taxes and increase revenue, while the European Union has virtually no room to maneuver.

Add austerity plans and public sector jobs cuts like we've seen in the U.K. (a reduction of 500,000 government jobs), and one will wonder how the bills will be paid on the Eastern side of the Atlantic. As 2011 approaches, the spending cuts will start to affect — and infect — the European economic engine. The bloated public sector that was created over the last 50 years cannot be undone in 2 or 3 years without major restructuring and disruption — and that task will take a generation to "correct."

According to the Agence France-Presse on November 1, 2010, Dominique Strauss-Kahn, the Managing Director at the International Monetary Fund (IMF), said at the International Forum on Human Development in Agadir, Morocco, that the "World economy crisis has destroyed 30 million jobs worldwide." Furthermore, and I hope that he is wrong, an "additional 400 million jobs will be lost" going forward.

Thus far the United States' share is 26% (8 million jobs) and if that percentage holds up, the U.S. will lose 104 million jobs, or close to 100% of its labor force, which is impossible. If Mr. Strauss-Khan is right, he's not talking about America!

Update 11/11/2010: LONDON (MarketWatch) -- Fears surrounding sovereign-debt problems on the periphery of the euro zone drove the cost of protecting the debt of Ireland, Portugal and Spain to record highs on Thursday, according to data provider Markit. The spread on five-year Portuguese credit-default swaps widened to 505 basis points from around 491 on Wednesday, topping the 500-level for the first time, Markit reported. That means it would now cost $505,000 a year to insure $10 million of Irish sovereign debt against default for five years. The five-year Irish CDS spread widened 27 basis points to 620, while Spain's spread widened to 294 basis points from 279. Greece's spread was 12 basis points wider at 890.

By comparing the spreads on November 11 to those in the table only 10 days prior, highlights the recent velocity of the issue — e.g., Portugal 505 vs. 387. If Europe is your investment destination via mutual funds, ETFs, or any other choice of securities, exercise extreme caution regardless of the chosen country — no exception — and be very mindful that the trouble only started to blossom. Opportunities do exist within the non-linear progression of the markets, but they will present themselves within short time frames and will require nimble investment management.

Disclosure: None