Confused about the eurozone crisis? Even the experts find it difficult to keep up with the rapidly changing events - as a result, some inaccurate assumptions have crept into investors' minds about the crisis. Here are a few of the more common misconceptions about the eurozone crisis.
This Is a Greece Problem
Greece has the unfortunate distinction of being the poster child for the eurozone crisis. However, to believe that Greece is the cause or even the primary player is inaccurate. Greece's new Prime Minister, Antonis Samaras, recently said that his country has entered a Great Depression similar to what the United States endured in the 1930s, but with a national debt of 370 billion euros ($500 billion), the European Financial Stability Facility has the resources to manage debt of this size.
Italy has debt obligations of 1.92 trillion euros ($2.64 trillion). Only five countries have GDPs higher than Italy's debt obligation and that doesn't take into account Spain or other eurozone countries that are showing signs of financial stress. Although Greece is on the front page of the financial news, it's the larger countries that have investors worried.
It Will End Soon
Werner Hoyer, head of the European Investment Bank said recently that he doesn't see the eurozone crisis easing in the next couple of years. The only positive words he had regarding its progress were that the political framework for dealing with it could improve within three years. Not only do many of the member nations have serious debt issues, the future of the euro currency is uncertain, making this both a fiscal and political crisis.
Europe Is Rich Enough to Bail Itself out
The size of the bailout fund needed to service the debts of the eurozone countries in distress could be as high as one third of the core countries' GDP. In contrast, TARP, the U.S. program that serviced the subprime mortgage crisis, was only 5% of the America's GDP. A bailout of this size is economically and politically unrealistic.
Although the eurozone is a union, it remains a collection of loosely tied countries with some becoming increasingly aggravated with the idea of using their country's resources to service another country's debt. What kind of political controversy would erupt if the citizens of Texas were called on to use their tax dollars to bail California out of its debt obligations?
The U.S. Isn't Affected That Much
Investors know that the U.S. investment markets are highly sensitive to the eurozone crisis. When a European politician speaks, it often moves the market, but that's not all. The eurozone is the world's largest economy and full of customers for companies ranging from Boeing to McDonald's. When Europe slows down, so does business for many American companies.
Next, the web of debt exposure is wide. French banks own a lot of Italian debt but American banks own a lot of French debt. If Italy defaults, American banks will feel the negative effects of such an event. These debt webs exist throughout the eurozone and the world.
The Bottom Line
Especially to those who don't live in the region, the eurozone crisis is confusing, complicated and rapidly changing. This not only affects short-term traders, but longer-term investors have come to realize that this problem probably isn't going away anytime soon and even long-term and more conservative retirement portfolios have to be allocated with the ailing eurozone in mind.
Exposure in non-domestic products may not be as appropriate for those with shorter-term time horizons as they once were, but for those just beginning to build a portfolio that won't be tapped for decades, non-domestic funds might represent a great value.
Regardless, having an expert level of knowledge regarding current European events may be unrealistic, but investors should attempt to monitor the crisis and make portfolio adjustments as necessary. A buy and hold strategy for non-domestic products may be ill-advised right now.