Portugal, Italy, Ireland, Greece and Spain Show Signs of Economic Life

Europe's PIIGS Beginning to Fly

Portugal, Italy, Ireland, Greece and Spain Show Signs of Economic Life
February 9, 2015

It is certainly not the most complimentary nickname. However, PIIGS is an acronym that is sometimes used to describe the economies of Portugal, Ireland, Italy, Greece and Spain, some of the weaker European economies.

The PIIGS nations have all been in (mostly) and out of recession since the financial crisis and thus out of favor with most investors. They all have a recent history of economic problems, including high levels of unemployment and heavy debt burdens, as well as political instability.

When PIIGS Fly?

There are, however, signs that things might be turning around — and that PIIGS, indeed, might be starting to fly. For starters, the PIIGS nations should benefit along with the rest of the European Union from the European Central Bank’s recent decision to buy 60 billion euros worth of bonds a month until at least September of 2016, or a total of 1.1 trillion euros in bond purchases .

The goal of the program, which will be similar to the U.S. Federal Reserve’s recently concluded Quantitative Easing (or QE) program, is to combat stagnation and raise the inflation rate in the Eurozone in order to revive the stagnant European economy. European stock markets responded positively to the announcement of the program, quickly soaring to seven-year highs.

The PIIGS nations should also benefit from the ongoing weakness of the euro against foreign currencies, especially the U.S. dollar. The euro plunged to a new low in late January when the ECB’s bond-buying program was announced, and some analysts believe the euro could reach parity with the dollar in the coming months.

A weak euro is generally considered to be good news for European stocks, including those of the PIIGS nations, since it will make their companies more competitive globally. It is especially helpful for PIIGS nations that rely heavily on exports, since it will make their products less expensive overseas.

In addition, the prices of European stocks and the stocks of companies located in the PIIGS nations are attractive right now. The ongoing positive impact of lower energy prices on consumer spending should also work in favor of European stocks in general, including PIIGS nation stocks.

Looking Closer at the PIIGS

Here is a closer look at each of the PIIGS nations’ economies and potential opportunities for investors:

Portugal — Home to about 10 million people, this small nation carved out of the western coast of Spain is the 14th largest economy out of the 28 countries in the EU. Portugal fell into a deep recession in the aftermath of the financial crisis, agreeing to a financial bailout from the EU in 2011 worth $78 billion in exchange for implementing a range of austerity measures. However, Portugal exited the bailout last May and said it was committed to continuing its financial reforms.

The service sector dominates the Portuguese economy, but Portugal is also heavily dependent on agricultural exports like olive oil, grain and cattle — as well as wood, cork and wood pulp exports — primarily to other EU nations. Therefore, it could benefit disproportionately from the weak euro.

Italy — It might seem surprising to see this much-romanticized country and Europe’s fourth-largest economy lumped in with the other PIIGS. Due to its rich heritage and abundance of tourist attractions, Italy is one of the most visited nations in the world. Therefore, as many as two-thirds of Italy’s roughly 61 million citizens work in the service industry, which is vulnerable to sudden and drastic slowdowns based on economic conditions.

Italy is one of the world’s most industrialized nations, its workforce is educated and the nation’s standard of living is high. However, the nation is also highly leveraged, with a national debt that is well over 100 percent of GDP, and its government is notoriously inefficient and highly politicized. The Italian stock market has been essentially flat since the mid-1980s — in comparison, the Dow Jones Industrial Average stood at around 1,500 back then. So Italian stocks are attractively priced and could represent a great buying opportunity now.

Ireland — Like Italy, this is another culturally rich PIIGS nation that people visit from all over the world. Its population is only a fraction the size of Italy's, though, at just 6.4 million citizens. Ireland’s economy boomed during the 1990s and 2000s, earning the nickname the Celtic Tiger. However, it came crashing down in 2008 when its housing bubble burst, falling into a deep recession.

Huge injections of cash into Ireland’s banks and heavy government intervention have helped pull the nation out of recession, but Ireland’s national debt (110 percent of GDP) and unemployment (10 percent) levels remain high. However, Ireland is one of the wealthiest countries in Europe and its economy, focused on services and technology, is recognized as a modern knowledge economy. It could therefore be well positioned to boom once again and revive its Celtic Tiger nickname.

Greece — Tourists flock to this nation to visit numerous historical sites and some of the most beautiful beaches on the Mediterranean Sea. In fact, the 20 million tourists who visit Greece each year is about double the size of its population. However, the word “Greece” has almost become synonymous with economic mismanagement and dysfunction, with unemployment at around 26 percent and national debt a staggering 176 percent of GDP.

After joining the EU in 2001, Greece began accumulating massive amounts of debt that soon surpassed the nation’s GDP. In addition, about half of the nation’s GDP is driven by its large public sector workforce, which is very slow to react to changing national and global economic and financial conditions.

Greek stocks fell by 15 percent in late January after voters elected the far-left Syriza party, which is determined to renegotiate the country’s debts and end its austerity measures. However, some believe this could be an overreaction to the election and represent a unique opportunity for investors.

Spain — It is also somewhat surprising to see Spain as a PIIGS nation. The fifth-largest economy in the EU, Spain enjoyed above-average GDP growth for fifteen years before its housing bubble burst in 2007, nearly collapsing the Spanish banking system. Along with high levels of unemployment (like Greece, about 26 percent), soaring government debt and a large trade deficit, this sent Spain into a severe economic downturn.

However, Spain has taken painful steps to reign in its debt, and its economy is once again growing, albeit slowly. Spain achieve a trade surplus in 2013 for the first time in thirty years and the International Monetary Foundation recently boosted its 2015 growth forecast for Spain, ranking it ahead of the other major Eurozone economies.

Risk and Opportunity in the PIIGS

There is certainly a degree of risk involved when deciding to invest in one or more of the PIIGS nations. There could also be tremendous opportunity. Take some time to perform more in-depth research into the PIIGS to see if they might indeed be ready to fly — and thus represent good investment opportunities for you.

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