There are two ways to reduce a high debt to GDP ratio, lower debt and raise GDP. Unfortunately for the PIIGS, they are unable to do either.
GDP is a very simple calculation. For the most part, you just add together consumption, government spending and investment, then make an adjustment for the import/export balance.
This article states that the S&P forecasts two more years of declining discretionary income in the PIIGS, which is in line with the trends we have seen so far. Less discretionary income means less consumption.
Government spending is being slashed by the day in the countries practicing austerity, so this component is declining.
Now we learn from this article that investment is declining, too. Foreign investment in the PIGS (that’s minus Ireland) has declined 38% since 2007.
If each component of GDP is simultaneously declining, where is the growth coming from? Even a dramatic increase in exports cannot offset the plunge of those three components.
As GDP worsens, the fiscal deterioration of these countries will continue. No amount of OMT, LTRO, ESM or OPP will be able to stop the coming defaults.