Understanding the European Crisis: Greece Is Not the Problem

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Understanding the European CrisisGreece Is Not
the Problem
By- Michael Lombardi
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• Greeces gross domestic product (GDP) in 2010 was
  only 304.87 billion. The proposed Greek
  bailout by the European Union includes about
  180 billion in cash and a 50 cut in Greeces
  debt. This is equal to more than one years GDP
  for Greece. Its a huge bailout. Its free money.
  The Greeks would be silly not to take itthats
  why, at the end of the day, theyll grab it with
  both hands.
• The perceived risk is that if Greek defaults, the
  first member of the 17-country euro zone could be
  eliminated and other countries would follow. This
  would cause problems for the relatively new euro
  (an ill-conceived idea in the first place),
• But the real problem is not Greece it is Italy.
  The third largest economy in Europe after Germany
  and France belongs to Italy. According to the
  World Bank, Italys GDP in 2010 was 2.05
  trillion, almost seven times bigger than Greeces
  economy.
• 
  

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• Yesterday, for the first time since September
  1997, the yield on Italys 10-year government
  bond hit 6.4. Ireland was forced to ask the
  European Central Bank (ECB) for a bailout when
  its 10-year bonds hit a yield of 6.5. For
  Portugal, the magic number was seven percent.
• The bottom line is that the European Union can
  afford a bailout of Greece and it can persuade
  big European banks to cut the value of their
  loans to Greece, because the ECB can backstop the
  European banks.
• But, put bluntly, the European Union cannot
  afford a bailout of Italy. This is the real
  problem. If Italy defaults, major European banks
  could go under the euro would collapse. We would
  need to bring Julius Caesar back from the dead to
  restore unity in the European Union.
• And whats Italy doing about their problems? Very
  little. The government bickers back and forth
  about austerity measures. So what does this all
  this risk among European Union members mean for
  small investors like you and me?

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• Where the Market Stands Where its Headed
• The Dow Jones Industrial Average opens this
  morning up 4.2 for 2011.
• Despite being old and tired, a bear market rally
  that started in March of 2009 continues to
  prevail today. The rally has lasted longer than
  most analysts had expected, including yours
  truly.
• Stocks will continue to ride the wall of worry
  higher against the backdrop of pessimism amongst
  stock advisors and investors, better than
  expected corporate profits, easy monetary policy,
  and lack of investment alternatives to stocks.
• What He Said
• Investors have been put into an unfair corner.
  Those who invested in stocks because they got
  caught in the tech boom (1999) have seen their
  investments gone. Now, those who have leveraged
  heavily to play the real estate game, because it
  is the place to be (2005), could see the same
  fate as the stock market investors. T

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