PIGS in doo-doo

Big falls in global stock markets, led by bank shares; ballooning spreads for credit default swaps (yes, alas, they do still exist); a flight to the perceived safety of the US dollar. It's deja vu, or at least 2008, all over again, but this time the focus of the markets' angst, or of the hedgies' mischief making, depending on which way you like to look at it, isn't the health of the global financial system. It's sovereign debt, and particularly the fiscal crisis in the EU's southern tier, notably Portugal, Greece and Spain. (Is the fourth of the PIGS Italy or Ireland? Discuss.)

The fact is, this latest crisis is not just about markets expressing a view on excessive government debt. If it were, it would make no sense for investors to seek safety in the Yen (Japan has long had one of the highest public debt-GDP ratios in the world) or the US dollar (the US is in its worst fiscal mess for generations and seems to have become at least as ungovernable as Greece or Portugal; and don't even mention the virtual bankruptcy of California). Yet that flight to "quality" has been much in evidence this week. Investors think they can trust the governments in Washington and Tokyo, but they're not at all sure about the EU. This is a crisis for the Eurozone, which up until recently seemed to have ridden out the global credit crisis with very little fuss.

The problem that has investors worried is that nobody is completely clear about the lines of responsibility within the EU for dealing with this crisis. The once-famous Maatricht criteria for admission to the single currency quickly fell into abeyance as each country joined the club. (Not that the criteria were ever that strictly enforced -- not long before the Euro was adopted, the only country in full compliance with the Maastricht rules was Luxembourg). Fiscal policy has remained under the control of national governments, and the ECB is forbidden to bail them out, though this has not prevented the bank from joining in with the global trend toward "quantitative easing".

Since markets began to fixate on the debt problems in Greece a few weeks ago, official pronouncements from within the EU have been unhelpful. One media commentator described the EU's attitude to the emerging crisis as "of course we'll help the Greeks, but don't tell the Greeks that". Even less constructively, ECB President Trichet suggested that admission to the Eurozone had conveyed all kinds of upfront benefits on countries such as Greece, and they could expect no help now if they had allowed things to go wrong.

This week the EU and ECB have had to pull back from Trichet's inflexible position, placing Greece on a sort of internal watchlist. However, the Greek government's efforts to get its fiscal house in order, which include reducing the budget deficit to the long-neglected Maastricht target of 3% of GDP by 2012, have provoked serious labour unrest. This has led markets to shift their focus onto Spain and Portugal, whose fiscal position is comparable to that of Greece, and where prospects for a smooth process of fiscal adjustment are equally dim. This is especially so in the case of Portugal, where a Trotskyite party won 10% of the vote in last year's national elections.

Greece should have been a minor and manageable issue for the EU, but because it failed to deal with it quickly and effectively it now has to cope with a larger and potentially much more intractable problem in the shape of Spain. Markets fear that in the worst case, the crisis could even spread into the heart of the original EU -- well, into Italy -- and put the whole Eurozone, and the single currency itself, at risk. That still seems far-fetched, but not nearly as much as it did a few weeks ago. Still, it's nice to have the focus move away from the UK's debt problems for a while -- though I suspect that relief will not last long.