‘PIGS’ in Rescue Lipstick Are Uglier Than Default: Mark Gilbert

Commentary by Mark Gilbert
Feb. 11 (Bloomberg) -- "The worst possible signal which we could send out is one calling for outside help," Greek Finance Minister George Papaconstantinou told Bloomberg Television this week. He may be the only policy maker in the European Union who understands how disastrous a bailout would be.
A rescue would scream to the world that Greece’s financial hole is too deep for it to get out unaided -- just as the Federal Reserve’s decision to supply $29 billion of guarantees so that Bear Stearns Cos. could survive by selling itself to JPMorgan Chase & Co. was a red flag about the cannibalism erupting in the credit-crunched banking industry.
Let Greece go bust if it can’t pay its own way. Sure, it will be messy and scary. A lot of banks will realize they still don’t focus enough on the credit quality of the firms they do business with. The euro project will suffer a crisis of confidence.
The lesson from the credit crisis, though, is that the alternative of helping Greece off a hook of its own making is far, far worse.
All of the "PIGS" -- Portugal, Ireland, Greece and Spain (and maybe Italy, if you’re feeling particularly uncharitable or
skeptical) -- have been living beyond their means, much like the investment banks did in the credit boom.
A bailout of one will produce the same outcome as the rescue of Bear Stearns did; moral hazard will kick in, and instead of allowing economic Darwinism to cleanse the gene pool, the weaker nations will lose any incentive to cut spending and trim their swollen deficits.

Risk Drifts

Welcome to "Credit Crunch II." By stuffing billions of dollars of taxpayers’ money into the balance-sheet holes of the banking industry, governments have transmogrified private risk into public liabilities. The "too-big-to-fail" label just reattaches itself to governments from financial companies.
The sequel, if the European Union or its members are suckered into some kind of Greek rescue package by buying, guaranteeing or even repaying its bonds, could end up featuring Portugal as Lehman Brothers Holdings Inc. and Spain as American International Group Inc. As Dennis Gartman, economist and publisher of the Gartman Letter research report, has repeatedly pointed out in recent years, there is never only one cockroach.

Debt Rollercoaster

European debt markets have been on a rollercoaster as they try to parse the EU smoke signals to judge whether Greece will win financial backing from its neighbors, or just verbal support. So far this month, the 10-year Greek yield has swung between 6.05 percent and about 6.8 percent as hopes for help waxed and waned. The euro, however, didn’t exactly jump for joy at the prospect of an aid package, which tells you that a salvage operation for Greece is no panacea for what ails the common currency’s economies.
Whenever the subject of the euro’s conception comes up, European Central Bank President Jean-Claude Trichet can’t hide a glimmer of paternal pride as he explains that one of the project’s finest achievements was yield convergence -- the elimination of gaps between the borrowing costs of member nations -- at lower, rather than higher, levels.
In the absence of a euro-wide fiscal policy that makes spending and revenue decisions, though, there’s really no reason for investors to accept the same return for lending to such economically disparate countries as Germany and Portugal, for example. You are effectively buying a foreign-currency bond because Portugal doesn’t have the individual right to print currency to make its debt payments, and it can’t devalue its way to prosperity.

Ceding Sovereignty

All of this was recognized and much discussed at the euro’s introduction a decade ago. Yield convergence was driven by the expectation that the rules of the euro club would impose economic discipline on its members. One possible outcome of the current crisis is for common-currency participants to cede more of their fiscal sovereignty; self-regulation hasn’t worked any better in the euro area than it did in investment banking.
Some people are talking as if there’s a simple choice facing European policy makers. Abandon Greece to its fate, the story goes, and unleash contagion trashing the creditworthiness of other, financially challenged euro participants. Throw a financial safety net beneath Hellenic debt, on the other hand, and you can eliminate the contagion threat.
In reality, if Greece can’t solve its problems alone, the choice is between two different kinds of contagion. Why would an Irish policewoman swallow a pay cut that helps her government curb its spending if an EU handout eases the strictures demanded of Greek public-sector workers?
If economic failure goes unpunished, then behavior doesn’t change -- another lesson that the finance world should have learned from the credit crisis. Daubing a layer of financial lipstick on the "PIGS" makes them less, not more, attractive.
(Mark Gilbert, author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable," is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.)

I couldn't have written it any better myslef. I do agree that greece needs to take accountability for its fiscal irresponsibility. I also do understand the ramifications of letting them default. However, Spain a country having financial difficulties at the moment was not irresponsible with its finances. They suffered from a property boom coupled with a lacking ability to devalue their currency. If Greece is bailed out then the others can operate under the same assumptions as previously stated. To me the question is not weather the "PiGS"should be bailed out, but can the Euro afford it? Will Germany and France be able to sustain the Euro economy dually without timely contributions from other participating members? If so, won't that hurt the Euro, seeing as the currency is based on the economies of 14 nations and not 2? Any insight would be greatly appreciated.

--Batman