Why the Stock Market doesn't like Souvlaki

The PIIGs Pentagon of Debt

This image (from the New York Times which I found in a thread on forums.overclockers.com.au) is what I loving refer to as the PIIGS' (Portugal, Italy, Ireland, Greece and Spain) Pentagon of Debt or PPoD.

The PPoD sums up the debt fears that are weighing down the stock and lending markets across the world. Now, like most Australians I used to think, who cares that the Greeks are having little trouble paying off a few loans. Well, basically the financial woes of Greece are small compared to the wider PIIGS debt levels and this pales into insignificance when you consider that the US debt is currently at around $12.5 trillion dollars, that is ten times that of Italy and approaching the value of their GDP.

So why do we need to care?

Well, basically the cost of borrowing money is going up. This obviously hits us quite close to home (literally) as it forces the banks to increase the spread between the Reserve Bank rate and the actual home loan rate that you are receiving. So, while the general public focus is on the Reserve Bank rates here in Australia, there should also be more consideration of the increasing loan costs by the Average Joe. The problem is that there is no easily accessible or understandable figure. There is the US Prime Rate and the London Inter Bank Offered Rate (LIBOR) which are the  rates that the banks used on a day to day basis to lend money to each other. But it is hard to draw a useful affect of the day to day changes of these rates against the long term cost of borrowing money from your local branch.

There is also the effect that this has on Australian and International business, it becomes harder and harder to fund new ventures and to generate new value when the cost of borrowing money goes up, this has the flow on effect of decreasing the productivity and ultimately the profitability of businesses, this means their stock is worth less and this leads to the widespread drops that you see in the global stock markets.

Also, in the end the markets value stability and while the Greek Parliament has passed the Austerity Bill we still don't have a clear picture of how the other PIIGS will perform. Or for that matter the US.

So, hang on to your seats folks, because I fear we are in for a bumpy ride.