Understanding the European Crisis: Greece Is Not the Problem

1. Understanding the European Crisis:Greece Is Not the Problem By- Michael Lombardi http://www.profitconfidential.com

2. Greece’s 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 Greece’s debt. This is equal to more than one year’s GDP for Greece. It’s a huge bailout. It’s free money. The Greeks would be silly not to take it…that’s why, at the end of the day, they’ll 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, Italy’s GDP in 2010 was $2.05 trillion, almost seven times bigger than Greece’s economy. http://www.profitconfidential.com

3. Yesterday, for the first time since September 1997, the yield on Italy’s 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 what’s 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? http://www.profitconfidential.com

4. Where the Market Stands; Where it’s 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 http://www.profitconfidential.com

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