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PIGS Monday July 16, 2012


We all know that the PIGS that have been feeding at the largess of government deficit spending are in real economic and political crisis. By PIGS of course we mean Portugal, Italy, Ireland, Greece and Spain. And we all know that Germany is the principal nation trying to rescue the European Union by not allowing these PIG countries to default on their loans, nor abandon the Euro currency.

Perhaps what you may not know is that Germany is not acting solely in the interests saving the EU, but acting to protect its own interests. You know from my past commentaries that I do not believe in altruism and have no doubt Germany is not being altruistic.

Here is what I believe is really going on. German banks were a huge creditor of PIGS nations debt to the tune of almost 3/4 of a Trillion Dollars. So if these nations had defaulted on their loans, German banks stood to lose a great deal of money, which would have caused chaos in the German financial system. Brings back memories of "too big to fail" if you see what I mean. By having the European Central Bank (of which Germany is just one nation) lend money to the PIGS, it made it possible for German banks to be repaid some of what they were owned and therefore reduce their exposure to the debt of the PIG nations and spread the exposure amongst the other members of the EU who gave money to the European Central Bank. Even if the German Government itself loaned money to say Italy, and Italy repaid loans owed to private German Banks, those loans no longer damaged the balance sheets and viability of those private German Banks.

I am not saying that this has solved the problem for Germany or its banks. The German banks are still owed a great deal of money by the PIGS, including Greece, but as Evertt Dirkson said "A billion here and a billion there and pretty soon you are talking real money." If JP Morgan Chase raised an outcry of public sentiment with its trading loss of 2 billion dollars, imagine how German banks would look and how its economy would react to loses in the hundreds of billions if the EU collapses with the default of some or all of the PIGS.

The EU was a giant step forward for European Peace and European trade, but a common currency continues to endanger its very existence and the stability of much of the world's economies. In the 70s and 80s we got used to high interest rates. But in the 21st Century we have gotten used to low interest rates; rates that we may not see again for quite some time.