Financial Problems in Europe

The economies of Europe's PIIGS - Portugal, Italy, Ireland, Greece, and Spain - are looking shaky. MoneyWatch's editors discuss the potential ripple effect these countries could have here in the U.S.

Jill Schlesinger: I’m Jill Schlesinger, Editor-At-Large Jack Otter: And I’m Jack Otter, Executive Editor. Jill Schlesinger: In today’s Reality Check, why are the PIIGS of Europe causing such a stink? Jack, we got Portugal, Italy, Ireland, Greece and Spain. They’re being called the PIIGS of Europe, why? Jack Otter: It’s not a nice name, I’d much rather be a brick than a pig. Jill Schlesinger: Yes, indeed. Jack Otter: They’re being called this because their financial situation makes us look like Goldman Sachs. Spain, 19% unemployment, Greece apparently, the estimates of its debt are 875% of the country’s GDP. Jill Schlesinger: Oh my gosh! Jack Otter: And so in America, we might think hey, it’s Greece. It’s far away. What’s the problem? It’s a small economy. But who may thought that in the late 90’s when Thailand had a currency problem and the Dow dropped I think, 550 points in one day and the entire global economy really stalled because of a problem that started in Asia. I think now in New Europe if you will, we could say the same thing. Jill Schlesinger: And the real fear is that people think okay, let’s say Greece were at the default on its obligations. Then it causes a ripple effect and people say to me, oh so how bad could that be? And I say well remember when we didn’t think the Lehman Brothers, and ripple effect wasn’t going to be big, that’s what people are worried about. But this week, the European Union is going to meet and do you think they’re going to bail these guys out? What’s going to happen here? Jack Otter: If I had to bet, I would say they probably will bail them out. And it’s a big problem, the European Union is kind of a union because they share the same currency but the economies are vastly different. I mean back when Italy had a Lira and has branded economic problems which it frequently did, it could just devalue the Lira, sells them out for a mail as cheap and the economy would come back. Now it’s all the Euro and so they don’t have that currency option and there are lots of problems and remember. Jill Schlesinger: And Germany and France who have stronger economies aren’t really very excited about bailing out their brothers and sisters to the south, right? Jack Otter: Especially now, because the entire global economy is so weak and I think that’s the real problem here. You know, in the Asian flu that was the late 90’s that the global economy was booming. Now, we’re all tottering. I mean these three legged stools are on two legs, if Greece cuts the other one out, I would be worried. Jill Schlesinger: So, do you think investors should do anything right now or do you think it is going to blow up and the stench is going to pass and we’re going to be okay, you think? Jack Otter: Well for anybody who didn’t notice, last year, the year before, it’s time to really be conservative to figure out as we always say what you’re going to do when your investment accounts for the worst case scenario. What happens if Greece defaults and the market correct 20% in the next 2 months; are you prepared for that? If you are, great. If you’re not, get conservative now. Jill Schlesinger: Okay, so we’re going to watch the stench from Europe. We’re going to make sure you check in to your portfolio and reallocate and most importantly remember that these things are going to continue to happen, especially this is a fragile recovery as you said so, it is okay for investors to be a little bit more defensive right now and be prepared for perhaps any outcome. So, that’s really the most important thing here, is that right? Jack Otter: Absolutely and I would give one more bit of advice and here is my old thing, I think emerging markets over the long term are a great opportunity. They ran up so quickly over the past 6 or 8 months, if something bad happens in Greece, maybe they’ll really correct and that could be a great entry point for long term investors. Jill Schlesinger: So that stench might be an opportunity and that’s your Reality Check.