Special Feature
Unfortunately, financial and economic linkages are strong in this era of Globalisation and, if Greece is pushed out, investors would start to fear the same fate for the other PIIGS, and will require higher yields to buy Sovereign debt from these troubled countries. No matter the efforts to accomplish all troika goals, Portugal, Italy, Ireland, and Spain would face prohibitive borrowing costs in public debt markets. That may trigger the need for a bailout in the giant of the pack - Italy or the need for further austerity in others. Downgrades from ratings agencies would follow, share values would suffer in those countries and the Euro will become more volatile. The problem of a simple, orderly exit by only Greece would likely turn into the problem of an exit question hanging over several other countries. If more than one country exits, or if one of the exiting countries is Italy or Spain, things would be uglier, much uglier... Italy and Spain are the fourth and fifth largest EU economies representing 12.5% and 8.5% respectively of the Union’s GDP.
Italian & Spanish equities weekly chart
66 www.financial-spread-betting.com | July 2012
If one of those is pushed out of the Eurozone, the negative effects would spread very quickly. First of all, the exit of one of those countries would almost certainly lead to the inevitable exit of all the other PIIGS. As a whole, they represent one quarter of EU GDP, not a negligible portion like Greece. The Euro would most likely suffer huge losses against the US Dollar, the Yen and the Pound as investors run for the exit from Sovereign bonds. Banks all over Europe own too many assets from these countries and their balance sheets simply wouldn’t be able to absorb the losses and many would fail. Credit conditions would tighten all over Europe and recession couldn’t be avoided. Italy and Spain are key to this problem and spread bettors should concentrate on how their specific situations develop. The Ibex 35 and the FTSE MIB have plunged more than 30% since 2011 and short positions continue to be favoured. Short positions on the large German and UK banks would be fertile profit hunting ground too.