The Crisis' Biggest Losers
09/23/2010 3:14 pm EST
The financial crisis that reached its most critical phase two years ago with the fall of Lehman Brothers had some big winners—in Asia, Latin America, and Scandinavia, as we wrote last week.Most of the countries and regions that had a “good” crisis had lived through near-death experiences—in Asia in
the late 1990s and in Sweden in the early 1990s. They cleaned house and changed their behavior.
The losers, though, are learning their lessons the hard way.
The countries that have lost the most lived way beyond their means—subsidized by speculative capital or the umbrella of a strong currency (the euro) to give their citizens a life style they hadn’t earned in competitive world markets. Government entitlements grew, along with complacency. Eventually, the merry-go-round stopped and the horses came crashing down.
The biggest losers came from the European periphery, whose worst basket cases—Greece, Ireland, Iceland, and so on—have become to this decade what Brazil, Argentina, and Mexico were to the 1980s and early 1990s. In fact, some of the European walking wounded already have gotten the same kinds of massive international rescue efforts their Asian and Latin American counterparts received back in the day.It’s a stunning role reversal. “Certainly from a debt perspective, they’re in much worse shape than the emerging markets right now,” says Alexander Young, international equity strategist for Standard & Poor’s Equity Services. “They’re much closer to the ‘crisis countries’ of ten to 20 years ago than to the emerging markets of today.” So, here’s my list of the biggest losers. Stock-market returns and data on gross domestic product played the biggest role in the rankings, but I also weighed intangibles—the “how the mighty have fallen” factor. There’s no shortage of those.
|1.||Iceland. Although it’s by far the smallest of the countries on my list, with a population of barely 300,000, none was more devastated by the financial crisis. A magnet for the “party-hardy” crowd, Iceland went on a financial binge, too. Its big banks had big dreams and borrowed heavily to achieve them: Debt ballooned to six or seven times gross domestic product.
When credit disappeared after Lehman fell, Iceland went into cardiac arrest. Its stock market lost 90% of its value, GDP plummeted, and a massive devaluation of its currency, the krona, drove the population’s standard of living down. Britons and others who poured their savings into Icelandic banks also lost their shirts. A criminal investigation continues.
|2.||Ireland. Remember the Celtic Tiger? Well, she turned out to be a pussycat with a shamrock. Ireland was the hot country of the 2000s as youth from throughout the euro zone flocked there for jobs in finance, software development, restaurants, what have you. When we visited in 2004, Dublin was bustling and full of construction cranes. The impoverished Limerick the late Frank McCourt wrote about so vividly in Angela’s Ashes became a boom town.
That was then. A property bubble burst badly, leaving Irish banks technically insolvent and the government deeply in debt—its ratio of deficit to GDP, at 14.3%, is higher than that of Greece. Policy makers moved quickly to slash spending and shore up the banks, but it wasn’t enough. On Thursday, Irish debt traded at a record four percentage points over the equivalent German bonds.
The Irish government pledges to cut more, but you can’t get blood from a blarney stone. Ireland’s stock market, down 36.2% a year since Lehman’s fall and 23.5% annually over the past five years, is the worst in Europe of those tracked by MSCI, Inc. GDP plunged 7.1% last year.
Next: Greece and Club Med
|3.||Greece. When it comes to crises, Greece is clearly in a league of its own. A strong euro and weak governments let the country borrow well beyond its means, while its public sector grew out of control. Last year, its deficit stood at 13.6% of GDP, slightly below Ireland’s. Tax evasion is widespread.
This year’s debt crisis produced a nearly $1-trillion rescue package of Greece and other potential euro zone deadbeats. The Greek government swears it’s serious about cutting its deficit to the targeted 2.8% of GDP by 2012, but the world doesn’t buy it: Its stock market has tumbled by 35% a year since Lehman’s fall, and at a 15% annual rate over the last five years. GDP has declined for seven consecutive quarters.
As Tina Fey, whose mother is of Greek ancestry, said in a recent SNL episode (you can watch the clip here, about 35 minutes in): “Really, Greece? Your retirement age is 54. Really? Greek people in America work the register at the diner until they die!”
Really, Greece? You expect the rest of the world to bail you out? Really?
|4.||The Club Med countries. Spain, Portugal, and Italy are wonderful places to visit, but would you really want to live there? Not now, with the fallout from the financial crisis still ravaging those southern European lands.
Portugal is probably the weakest of the three, the victim of too much debt and overbuilding, and with not much to sell in world markets. Spain is much bigger and more diversified—and it has world-class multinationals like Telefonica (NYSE: TEF) and Banco Santander (NYSE: STD)—but it, too, is hardly a giant on the competitive stage. When was the last time you bought a Spanish-made smart phone or a Portuguese car? Spain’s problems were papered over by a huge real estate bubble whose collapse has pushed unemployment to above 20%, among Europe’s highest.
Italy actually has some competitive industries (autos, oil, luxury goods), but years of stagnation and bloated spending have taken their toll: The Italian stock market was the worst of these three over all periods we tracked—down more than 15% annually since Lehman’s collapse and nearly 9% a year since 2005. Its public debt to GDP ratio stands at about 120%.
|5.||Austria and Hungary. Once proud partners in the mighty Austro-Hungarian Empire, which was dissolved after World War I, Austria and Hungary became two of the biggest victims of the financial crisis.
Hungarian consumers borrowed big for loans that were then in cheap Swiss francs and euros. When the Hungarian forint collapsed, their monthly payments became unaffordable. Hungary had to take $25 billion in emergency financing from the International Monetary Fund in 2008.
Hungary’s debt may reach 7.5% of GDP this year, and unemployment is above 11%, while GDP fell more than 6% in 2009. The stock market has slid 11.25% annually since the fall of Lehman.
Meanwhile, Austrian banks became big lenders to Eastern Europe, including Hungary. It seemed like a great idea in the 1990s, when the Iron Curtain fell, but it hasn’t worked out too well: Austrian banks are now on the hook for tens of billions of dollars’ worth of those loans in Swiss francs and euros to Hungarians and other Eastern Europeans, although they passed the recent European stress tests.
Austria’s stock market has flunked every exam, however—down 24% a year since Lehman’s collapse and off 11.75% annually over the last five years.
ETFs of markets mentioned in this column:
These three Exchange Traded Funds allow you to invest in countries mentioned in this article:
iShares MSCI Spain Index (NYSEArca: EWP)
iShares MSCI Italy Index (NYSEArca: EWI)
iShares MSCI Investable Austria Index (NYSEArca: EWO)
Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own.