Since last year, we've witnessed what was once touted as an examplary economic states such as Iceland and Ireland fall precipitously. The economies were booming with hot monies coming from foreign carry traders that credits were very easy to come by. This led to asset bubbles and the delusional wealth effect that encouraged people to buy imported big ticket items. Then before you know it, foreign investors were demanding their money back.. It was just a matter of time. And I think China has learned the lesson from Japan and these two countries. Unfortunately, the European problem is much more than these two states. The diagram below shows you that in 2011, these PIIGS have much bigger debt level (relative to their GDP) to finance compared to 2010. If these countries had so much problem meeting their obligations this year, what will 2011 bring?
I personally think that the Spanish problem is the most troublesome given its size of the economy. I hope that the Spanish policy makers are right in that their problem is manageable and that they are not in denial.. Maybe the word you will hear more often in 2011 will be moratorium or debt restructuring.
(Source: http://cafe.daum.net/riskmgt)
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