Exposing the Real Trading Partners of PIIGS

By Edgar Ambart - July 11, 2012 | Tickers: BBVA, BAC, C, GS, JPM | 0 Comments

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While the media is becoming saturated with the European debt problems, investors are not taking the time to skip all the rhetoric to concentrate on the core fundamentals.  This is where I come in.  I want to know what types of goods are being exported to Germany from the U.S and how much.  I want to know what Italians are buying the most that we are producing.  I also want to know why we care so much about Greece, when their total imports from the U.S. is so insignificant.   Maybe it is not the specific impact towards our economy investors are worried about, but rather how the intertwined indebtedness of the PIIGS (Portugal, Italy, Ireland, Greece, Spain) will play out in the future, as well as how our banks are managing their toxic assets of European exposure.    

Before I dive into the specifics of each country and the type of goods they import and export, please take a look at this chart that depicts the borrowing maze of PIIGS roughly one year ago.  Confusing indeed.  

Portugal:  Let’s start with their lack of productivity and poor educational system which ties in very close to their rigid labor markets.   Roughly 7% of the country’s college graduates cannot secure stable employment.  Compare that to the current masters degree holders unemployment rate of nearly 3% here in the States.   Recent austerity measures also included a 5% salary decrease and a 2% tax increase to fight the budget deficit from 9% in 2009 to 4% in 2012.  Portugal exports wine, chemicals, oil, rubber, hides, leather, footwear and machinery to the following countries:  Germany (13%), Spain (26%), France (12%), (U.K 5%), and Angola (5%).  It imports chemicals, vehicles, agricultural products, computer and accessories from the following countries: Spain (31%), Germany (14%), France (7%), Italy (6%), and Netherlands (5%).

The five largest financial institutions J.P Morgan Chase (NYSE: JPM), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), Bank of America (NYSE: BAC), and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA) are still heavily exposed to Europe.  Among the mentioned banks there is approximately $80 billion exposure to the PIIGS.  Thanks to credit default swap financial instruments,  the said banks have reduced their exposure to $50 billion, by protecting the $30 billion with these insurance swaps.   

Ireland: England’s neighboring country saw its strength diminish in 2007 as that period marked the peak of its real estate bubble. Home values have dropped 50% and it was faced with significant reduced revenues and a burgeoning budget deficit.   The country’s 2009 budget cuts were not sufficient, and in 2010 the deficit reached 32.4% of GDP, which was the world's largest deficit in terms of GDP. The IMF extended a $112 billion loan to aid Dublin in revamping their financial sector and avoid sovereign debt default. Ireland's austerity plan to trim additional $20 billion from its budget is expected to bring the country back to modest growth within four to five years.

Ireland's $124 billion exports include machinery, computers, chemicals, pharmaceuticals, live animals and animal products. United States is the largest exporting partner at (22%), followed by UK (16%), Belgium (15%), Germany (8%), France (5.3%), and Switzerland (4.1%).  Last year it imported approximately $60 billion worth of data processing equipment, machinery, chemicals, petroleum, textiles, and clothing from its importing partners - U.K. (38%), U.S. (14%), Germany (7.5%), Netherlands (5.5%) and China (4%).  The United States investment has been the epicenter of the country's modernization and growth in the last 25 years.   There's roughly 600 U.S. subsidiaries in Ireland that employ over 100,000 citizens in high tech, manufacturing, finance, and pharmaceutical industries.  

Italy:  The boot exported $447.2 billion worth of mechanical products, apparel, and transportation equipment in 2011 as well as metal, chemical and agricultural products.   Its export partners were Germany (13%), France (12%), U.S. (6%), Spain (6%), and U.K. (5%). It imported $480 billion worth of transportation equipment, metals, wool, cotton and crude. Its import partners were Germany (16%), France (9%), China (6%), Netherlands (6%), Spain (4%), Russia (4%) and Belgium (4%).  Italy enjoys a rather higher standard of living than Portugal with a higher GDP per capita of $30,464 compared to Portugal’s $22,413.  While it stood to be the world’s 7^th largest exporter in 2010 by conducting 59% of its trade with the European Union, it still relies heavily on its tourism revenue of roughly $39 billion a year.  Italian public debt hovered near 116% of GDP in year 2010, which ranked 2n right after Greece’s 127%. 

Greece:  According to New York Times, Greece remains the most economically stressed nation out of the Euro zone.   The country has the worst of it all: political corruption, public debt and unemployment above the European average.  Greece violated EU's Growth and Stability Pact budget deficit numerous years and misreported figures in order to maintain the monetary union guidelines.   These actions, in turn, enabled the government to hide the actual deficit from the EU overseers, allowing them to spend more beyond their means.  Greece’s economy contracted by 2% in 2009 and 5% in 2010 with debt levels rising to 127% of GDP. Its unemployment soared to 22.6% at the beginning of 2012. 

Greece exports food and beverages, petroleum products, cement, chemicals and other manufactured goods to Germany (11%), Italy (11%), Bulgaria (6.4%), Turkey (5%), U.K. (5%), Belgium (5.1%), China (4.9%), Switzerland (4.5%), and Poland (4.2%). It imports machinery, transportation equipment, fuels and chemicals from Germany (10.6%), Italy (10%), Russia (9.5%), China (6%), Netherlands (5%), France (5%) and Austria (4.5%).  Before 2009, it heavily imported military aircrafts, aircraft launching gears, engines and turbines, inorganic chemicals, oilfield equipment and coal from United States.  But the sizes of those orders have decreased far less from its prior scale of $1 billion per criterion.  Again, not so significant in comparison to our $14.5 trillion GDP.

Spain: It has the 13th largest economy in the world. Despite its recent real estate boom with construction reaching approximately 15% of GDP, it saw a tremendous rise to its middle class personal debt, which nearly tripled.  Similar to our subprime crisis, the real estate boom of Spain came to a halt as the mortgages exceeded the value of their homes.  Spain took Germany by a swift surprise in nearly surpassing their per capita income in 2011. According to CIA World Factbook, Spain's budget deficit has made it vulnerable to financial contagion from other highly indebted eurozone members despite its efforts to cut spending, privatize industries and boost competitiveness through reforms. The relatively high exposure of Spanish bank Banco Santander SA to the collapsed domestic construction and real estate market still poses a continued risk for the sector.

Spain exports machinery, motor vehicles, chemicals, shipbuilding, electronics, pharmaceuticals and medicines to France (19%), Germany (11%), Portugal (9%), Italy (9%) and U.K. (6%).  It imports fuels, chemicals, machinery and equipment, medical control instruments and consumer goods from its following partners: Germany (12.5%), France (11.4%), Italy (7%), China (7%), Netherlands (5.5%) and U.K. (5 %). Again, U.S. is not in the import/export partner list, but the three main financial institutions that are heavily exposed to these countries are Citigroup, and Deutsche Bank. 

After dissecting the aforementioned trading partners, one can't help to conclude that maybe we should be paying more attention to Ireland (our largest export partner) rather than Spain or Italy. I also take note that due to globalization and increased trade, plagued European countries that have no direct trading with United States, still affect us indirectly.   But was the massive sell-off in our markets warranted? And was it necessary for media outlets to hold hands and pound our markets to the ground with European pessimism? Our domestic economy is doing much better than the gloom and doom that is constantly fed to us by the media outlets.  One can invest with a little bit more confidence with good old common sense and extensive due diligence of foreign markets.  It is not the end of the world, our economies can still move forward with 80-90% employment. 

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