Back on November 17 of last year, I wrote that the PIIGS -- Portugal, Ireland, Italy, Greece, and Spain -- were not going to go quietly with regard to their debt problems and impending fiscal crises.  While I didn’t hazard a guess at which domino would fall next, I suppose Portugal was as good as any of the five.  And so it is that Portugal enters the news with tidings of a potential bailout on the horizon as the country is swallowed up by its enormous debts.

I encourage you to read the November 17 piece for background, but suffice it to say that the PIIGS spent much of the 2000’s living beyond their means, and now the balances are coming due.  Bad investments, overspending, outlandish fiscal promises and sundry other mismanagement have left these nations teetering on the brink of financial meltdown.  Luckily for them, they belong to an economic collective known as the European Union and will benefit greatly from the largesse of the European taxpaying population writ large, with EU officials overseeing the transfer of wealth from innocent civilians to the afflicted governments.  Sadly, that’s what it boils down to -- bad bets on the part of PIIGS bankers and government officials will be repaid with the taxes of their citizens.  Sound familiar?

You may recall in the November 17 article that I discussed bond yield spreads as a barometer of how much the markets were anticipating a default.  The current spread between the Portuguese bonds and relatively safe German bonds is at  4.04% (Portuguese bonds are at 7% right now), reflecting investors’ diminishing confidence that Portugal can remain solvent.  I continue to recommend watching this figure closely as the crisis unfolds -- any sharp movements may signal that it’s time (or too late) to move out of positions that could prove vulnerable should the European crisis mushroom.

I watched a brief update on this situation today on Bloomberg, and I liked the very simple and straightforward explanation of the crisis’ implications provided by one of the guests.  Basically, the PIIGS have lived beyond their means for several years, and as in any imbalanced scenario such as this, a proper balance must now be restored.  Thus, Portugal must swing the other direction for some time to come and begin to endure more privation to make up for its recent profligacy.

Interestingly, Portugal’s deficit-to-GDP ratio of 9.4% is hauntingly similar to the US ratio of 9.3%.  As Portugal prepares to enter a period of austerity and potential unrest among its citizens, I can only wonder at the magnitude of a similar crisis here, given that we have overextended ourselves on a much higher scale than Portugal when you factor in the $50 trillion or so of fiscal obligations that have yet to come onto our balance sheet (but will within this decade).

It’s helpful to analogize all of this to an individual who spent years piling up credit card debt; eventually, he’d have to cut expenses, live below his means, and correct the imbalances in his finances in order to liquidate the debt and restore fiscal balance.  The glaring difference is, in the case of the individual, he would be held strictly accountable and would suffer the consequences of fiscal irresponsibility; in the case of the PIIGS, the governments exercised the fiscal irresponsibility, but will suffer no consequence for it, as they pass along the bill to their constituents. 

By the time you read this, Portugal’s bond sale scheduled for Wednesday, January 12th will have taken place (5:30am EST), and its results may provide some clues as to where the crisis is headed, at least for the short term.  A successful bond sale will demonstrate some measure of investor confidence that Portugal can pull through this, whereas many observers feel it’s a foregone conclusion that Portugal will be forced to seek an international bailout no matter the bond sale outcome.  We can only wait and see at this point, and as always, review our respective portfolios to gauge readiness for the aftermath.