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Euro notes - Source: Thinkstock
Over the past few weeks we've seen a resurgence of the PIGS. Or should I say the resurgence of the threat of their potential demise.
Portugal, Ireland, Greece and Spain are some of the most precariously heavily indebted countries in Europe.
Earlier in the year it was Greece that grabbed the headlines and struck fear into the hearts of global markets as it teetered on the brink of default. But the sovereign debt crisis appeared to ease after Greece was granted a bailout and began to implement strict austerity measures earlier this year, in a bid to rein in those potentially deadly debt levels.
The domino was stabilised.
But in fact it seems that while sovereign debt was no longer in the headlines, the problems faced by the debt plagued countries of the euro zone were still simmering away under the surface. This week they bubbled back up to the surface, with this time Ireland being the focal point for renewed fears of contagion.
Unlike Greece though, Ireland has been reluctant to accept it needs helps. Despite its public deficit sitting at around 30% of Gross Domestic Product (10 times the EU limit of just 3%), its politicians repeatedly insisted that it was funded until the middle of next year and it was only the banks, plagued by the fallout from the housing market slump, that needed help.
It was like Ireland versus the world, or at least Ireland against EU officials. The fatal flaw in their argument, as I see it, is that the problem cannot be ring-fenced as being solely with the banks when the state had opted to act as guarantor for the liabilities of the banking system.
So it's no surprise that despite Ireland's protestations, a team from the European Central Bank and the International Monetary Fund was dispatched to Dublin on Thursday (Dublin time) to make the preparations anyway. They were undoubtedly prompted to act with urgency due to fears that if Ireland, in its obstinance, were to topple, others could soon follow.
That fear certainly took hold on the markets this week and investors headed for the investment hills. And that fear is by no means baseless. There was a lot of talk about the threat of contagion when Greece ran into trouble, and the same applies to Ireland. It may only account for a small proportion of the total European Union's economy, but if it was to be the first to default even a small domino could trigger an almighty mess.
This week the president of the European Union, Herman van Rompuy, called it a "survival crisis". While he's since sought to play down that comment, there's some truth to it as it's all about borrowing on international markets.
OM Financial's Nigel Brunel said on NZI Business this week "if there's a bit of fear that one country's going to have problems then people start looking round at others, so borrowing costs start to go up for all nations that are having those sort of problems". For those other countries with high debt levels, a spike in borrowing costs could spell disaster.
It now appears Ireland will have to accept a rescue package of some kind, albeit reluctantly. The governor of the Irish Central Bank, Patrick Honohan, certainly seems to think so. He told Ireland's state broadcaster RTE he believes a bailout is inevitable and it could be in the tens of billions of pounds. It will also have to be accompanied by some potentially painful austerity measures as well.
A bailout would help to again ease the threat of contagion in the Eurozone and remove at least one of the growing list of threats to the global economy that overnight led the OECD to downgrade its forecast for global growth for 2011.
So the Irish domino looks as though it will be soon be stabilised and the sovereign debt crisis will again slip from the headlines. For now, at least.
