March 2012
Preamble: We in Hong Kong might have been overwhelmed by news on the election of the Chief Executive of Hong Kong these days. Attention has been drawn to local issues such as education, housing, credibility of the candidates, etc. Let’s put these aside and look at some economic issues that have been seriously affecting the global economy.
1. What does PIIGS mean?
- The original acronym PIGS (歐豬四國) refers to the four European countries that have similar economic problems. They are Portugal, Italy, Greece and Spain, and the acronym can be traced back to as early as mid 90s. Since 2008, Ireland has been added to the pack, forming PIIGS (歐豬五國).
2. What does BRIC or BRICS mean?
- The economic community likes to use acronyms to refer to groups of countries sharing similar economic environment.
- BRIC (金磚四國), coined by Goldman Sachs in 2001, stands for Brazil, Russia, India and China, countries known for their vibrant emerging economies. Since 2010, South Africa was added to the group, making BRICS (金磚五國).
- There are other groups, such as N11 (新鑽十一國), VISTA (展望五國), CIVETS (靈貓六國).
-
These groups of
countries can be characterized as high growth countries.
|
BRICS |
|||||
|
Country |
2011 GDP |
Inflation |
Interest Rate |
2010 Export (% GDP) |
Reserve (Billion USD) |
|
China |
9.2% |
3.2% |
6.56% |
26.84 |
3181 |
|
Brazil |
2.7% |
5.85% |
9.75% |
9.67 |
358 |
|
India |
6.9% |
5.32% |
8.5% |
12.72 |
259 |
|
Russia |
4.3% |
3.7% |
8% |
27.04 |
457 |
|
South Africa |
3.2% |
6.3% |
5.5% |
22.5 |
40 |
3. What is sovereign debt crisis?
- We all know what debt is. When you spend more than you can earn, you need to borrow money. That is, you have a debt.
- Like individuals, companies and countries can borrow money too. Big companies and countries borrow money by issuing bonds (see Bonds and iBond notes).
- When countries borrow money, the debt is called sovereign debt. When countries cannot pay off their debts, they have a sovereign debt crisis. Greece is the first country within European Union (EU) that gets into sovereign debt crisis. Analysts are speculating that the next country would be Portugal.
4. What happens when a country is in sovereign debt crisis?
- When a country cannot pay a debt by the deadline, she can either declare bankruptcy (i.e., default on their loans) or seek help from regional and international organizations.
- For Greece, the saviors are the European Central Bank (ECB) and International Monetary Fund (IMF).
- To secure the loan, Greece has to agree to reduce their debts by cutting retirement and government spending and negotiating with lenders to agree to accept only parts of the loan. This leads to social unrest in Greece.
5. How much debt is too much?
- Economists use debt-to-GDP to measure the size of a country’s debt. Greece has a debt-to-GDP ratio of 173% in 2012. That is, it takes 173% of what Greece can produce in one year in order to pay off her debt. Of course, this is only theoretical, because a country (or no one) cannot produce without first spending some money.
- In order to reduce the debt, a country has to cut government expense and raise productivity (to increase income). Unfortunately, there is a dilemma: cutting government expense often means lowering national productivity. This is a problem facing most high debt countries, including USA, United Kingdom, and the PIIGS countries.
- Another measure of debt level is the budget-deficit-to-GDP ratio, which refers to the size of the government budget deficit as a ratio of GDP. Greece’s budget-deficit-to-GDP was 10.3% in 2010 (after amendment), and 9.1% in 2011.
- When EURO Zone was set up in 1999, the member countries knew that they had to control their deficits and set a guideline of 3% for budget-deficit-to-GDP and 60% for debt-to-GDP. Greece definitely has greatly exceeded the guideline, but even Germany has exceeded it.
|
Debt of European Countries in 2012 (Estimates) |
||
|
Country |
2012 Deficit (% GDP) |
2012 Debt (% GDP) |
|
Germany |
1 |
81.2 |
|
France |
5.3 |
89.2 |
|
Italy |
2.3 |
120.5 |
|
Portugal |
4.5 |
111 |
|
Spain |
5.9 |
73.8 |
|
Greece |
7 |
198.3 |
|
Netherland |
3.1 |
64.9 |
6. Don’t they know that they cannot borrow too much?
- Sure. According to Treaty on Stability, Coordination and Governance (Dec 2011, revised Mar 2012), EU states must stick to the following rules:
l General government deficit must not exceed 3 % of GDP (deficit-to-GDP ratio)
l Structural government deficit must not exceed 0.5% of GDP
l General government debt does not exceed, or is sufficiently declining towards, 60 % of their gross domestic product (debt-to-GDP ratio)
l The Court of Justice of EU may impose on a non-complying state a penalty of up to 0.1% of its GDP
l Contracting States shall incorporate the rules into its national law
7. I did not know that there are two kinds of government deficits.
- General budget deficit occurs when the spending of a government exceeds that of its financial savings.
- Structural budget deficit occurs when the general government expenses exceed the income of its current revenue structure (e.g., taxes, fees, and land sale), meaning that the government has insufficient income to maintain services at the current level.
8. Why should we care about EU’s economy?
- Export is one of three driving forces (together with investment and consumption) of China’s economy. An estimated 200 million jobs, or a quarter of China's workforce, are directly dependent on international trade.
- EU is China's single biggest export destination, with a total value of exports $356 billion in 2011, or 18.8 percent of all the goods shipped from China, among which $62.3 billion goes to PIIGS countries, $4 billion to Greece, and $76.4 billion to Germany.
As of today (June 2012), the EU crisis is still going on. It is a great, albeit painful, lesson for us to learn.