Why You Should Care About PIGS

Feb. 10, 2010 — -- Portugal. Italy. Greece. Spain.

On Wall Street, these fabulous European vacation destinations are known simply as the PIGS-- short for Portugal, Italy, Greece and Spain. You may come to know them as the latest scourge to your 401(k), just when it was starting to look like something you might retire on again someday.

The financial markets are obsessed with the PIGS right now. All four of them, and especially Greece, are reeling under crushing government debts. Global investors have little confidence they'll be able to keep paying them, so their cost of borrowing money has gone way up, driving the PIGS into an even deeper hole.

There is talk of default and fear of contagion, as investors question how many more governments have run up bigger bills fighting this recession than they will ever be able to repay.

"It is a dangerous situation," says University of Chicago economist Rajan Raghuram, who says he believes another full-blown global credit crisis is possible.

"We could go right back to where we were," says Walter Russell Mead of the Council on Foreign Relations. "Even seasoned market participants don't know what will happen next."

Case in point: on Monday the Dow Jones industrial average dropped more than 100 points on concerns Greece was about to default on its debts. On Tuesday, the Dow rose 150 points on rumors a consortium of European nations, led by Germany, may be preparing to bail out Greece.

"Sovereign credit risk is the risk factor du jour," says Tony Crescenzi, a senior vice president at PIMCO, a global investment management firm.

Just as investors once worried about over-leveraged banks -- and how far the fallout would reach if they failed -- they now worry about over-leveraged countries.

"It's a typical aftershock after a big banking crisis to get a big sovereign debt crisis," says Harvard University economist Ken Rogoff, who has just co-authored a book on financial crises.