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Why Investors Should Put PIIGS in Perspective


Strategists debate whether investors are overreacting to the sovereign troubles in Europe.

The three-week dip in the stock market is the most serious seen over the last 11 months.

So writes Fred Dickson of D.A. Davidson this morning, who points out that the major market indices have pulled back approximately 8% from the rally peak seen in mid-January, leaving them with year-to-date losses between 4% and 6% depending on the specific index.

The hand-wringing among investors, say strategists, has centered around the creditworthiness of a handful of European countries, specifically Portugal, Ireland, Italy, Greece, and Spain, referred to dismissively now by traders as PIIGS given their bloated budget deficits and low growth prospects.

The four countries, notes Gluskin Sheff's David Rosenberg, account for 37% of Eurozone GDP.

The strategist points out that Greece's GDP has already contracted by 3% year-over-year, as of the fourth quarter, and is expected to contract 1.1% in 2010 and 0.3% in 2011 as a 13% deficit-to-GDP ratio is sliced from 13% to 3%, assuming this fiscal goal can be achieved politically, he says.

Market pro John Mauldin points out that Greece's default history isn't exactly pristine. In fact, the country has been in default in one way or another, he notes, for 105 of the past 200 years.

"Aristotle, can you spare a dime?" Mauldin asks.

For its part, Portugal has a 9.2% deficit-to-GDP ratio. Spain has a deficit ratio at 11.4% of GDP.

The bottom line, Rosenberg wrote to his readers this morning, is that even if the fiscally challenged countries of Europe don't default, or leave the Union, they will have to take draconian measures to meet their financial obligations.

"This poses a hurdle over global growth prospects at a time when Asia will feel the pinch from the credit-tightening moves in China and India," he says.

Certainly, strategists say, jittery investors have taken notice, deciding to ditch risky assets like stocks and commodities with money moving into the dollar and US Treasurys.

But is this response by US investors to the debt problems of the PIIGS appropriate? Or an overreaction?

We checked in this morning with market pros, who weighed in with conflicting views.

For his part, Mike O'Rourke, BTIG's Chief Market Strategist, can't get too worked up about the headline-grabbing worries from across the pond.

Default, he says, isn't likely and, before leaping for the exits, he cautions investors to maintain perspective: The GDP of the Greek economy ranks somewhere between Michigan's and Ohio's while Portugal's is a little larger than Maryland's.

Another way to look at it, he says, is that the Greek economy is roughly equivalent to the market cap of Exxon (XOM) back in November at its most recent peak.

If you add the GDP of most of these countries together, he says, they will equal the size of one systemic institution in the US.
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