PIIGS putting world economies in peril


The longer the European debt crisis lingers, the worse it will be for everyone - including investors on the ASX.

The problem at the heart of Europe is that there are 27 countries all trying to look after their own interests, and only one Central Bank and one currency with which to do it with.

At one end of the spectrum you have Germany, which has been holding the European Union together financially since the global financial crisis (GFC).

At the other end of the spectrum you have the PIIGS - Portugal, Ireland, Italy, Greece and Spain - which are in debt up to their eyeballs and, in the case of Greece, need more monetary assistance in the next two months just to pay the bills.

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In a pre-euro system the answer would have been simple, the PIIGS would have started up the printing presses in their individual currencies and tried to inflate their way out of trouble, very similar to what the US did during the GFC.

This is never going to be a long-term solution, but it would be enough to keep the economic wheels turning in these countries with the depreciating currency helping to kick-start exports. Unfortunately, with a single currency linking the fortunes of 27 countries, this isn't going to happen unless the EU breaks up. And that would tear the heart out of the one country that's been keeping the alliance afloat - Germany.

While Germany has been carrying the rest of the European community, a few things have been quietly festering in the background.

First, the German banks have assumed the lion's share of European debt, hence leaders such as Deutsche Bank have found themselves with toxic assets in the form of Greek, Italian and Spanish bonds on their balance sheets.

Should there be a default of any sort by one of the weaker nations, then the heart of the German banking system will feel it.

To understand the implications of this, you only have to remember the fall of Lehman Brothers in 2008 to see what impact a credit freeze can have on the global banking system.

When international credit markets dry up, the resulting shudder will be felt throughout the global banking community all the way down to the smallest investor on the ASX.

Germany now finds itself between a rock and a hard place. Choice A is to see the EU split, returning to individual currencies and each country individually trying to print its way out of trouble.

Choice B is to hold the EU together, continually propping up the PIIGS, and potentially printing more capital and devaluing the euro.

Both situations hurt Germany - it's a case of the parasite killing the host. I'm glad I'm not in German Chancellor Angela Merkel's shoes.


_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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