Arnold, I agree with your analysis of the Greek crisis until you start comparing it to the Vietnam domino theory. The American problem is not Greece. But it’s Italy. The European banks, and some American bank, have lent money to Greece and a larger, much more substantial amount to Italy. The pain comes, for example, if banks or sovereign government loan $100 to Greece and they subsequently repay $50, these entities would incur large losses which would affect their capital and liquidity requirements. The larger problem is with Italy.
Monies lent to Italy, mostly by the European Union, are significantly larger than money lent to Greece. If the European Central Bank and other banks elect not to bail out Greece, America will get nervous if it sets a precedent for Italy. If Italy defaults and is not bailed out, it will cause a severe liquidity problem in Europe and could trigger a 2007 style recession in Europe.
The big deal for America is that our public companies, particularly our biggest 500 companies, derive about 1/3 of their sales from Europe. If those sales were to be eliminated, the equities from those stocks could lose about 1/3 of their value. Our country has struggled for four years to generate growth in our economy and that growth has been marginal at best. If our big companies lose1/3 of their sales, that could lead to another round or recession and, worse, higher unemployment. And that is no baloney!.
James M. Castiel, president
The Castiel Insititue of Wealth and Risk Management