A European country is struggling to rein in its swelling budget deficit. It chooses to sell additional treasury bonds to fund its spending needs/desires.
The European Commission doesn't like the direction its member country is heading with that rising deficit. So the group publicly pressures the member country to act more responsibly.
Investors view the EC warnings as additional reason to steer clear of the country's bonds. That sends existing bond prices lower and yields higher. Even at higher yields, the bonds have weaker and weaker demand, making it difficult to offset the high level of spending in that budget.
The country has to acknowledge that its deficit is likely to rise in spite of its bond issuance. Why? Because the higher cost of borrowing makes it harder to pay back the loans in future budget years. The European Commission begins tough talks yet again and a vicious spiral is set in motion.
Does this oversimplify things a bit? Yes. Nevertheless, we're seeing very low appetite for the bonds from the "PIIGS," even at unbelievably high yields. Apparently, the risk of default for Portugal, Italy, Ireland, Greece and Spain is viewed as enormously high.
A long time ago, I discovered that you could sometimes tell how well a company's stock price might perform when there was strong demand for the same company's debt. Similarly, when investors were backing away from a company's bond debt, its stock price often struggled.
If we apply the same logic to the "PIIGS," we might expect stock assets for Portugal, Italy, Ireland, Greece and Spain to suffer more than other European countries. Here's a look:
In truth, all of the eurozone is being hit hard ... not just by the sovereign debt blowup, but by the recent resurgence of the U.S. dollar. In the near term, foreign stock funds are losing some of their value because of the seven-month low for the euro vs. the U.S. dollar.
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Gary A. Gordon, MS, CFP is the president of Pacific Park Financial, Inc. He has more than 20 years' experience as a personal coach in money matters, including risk assessment, small business development and investment. Gordon is often asked to consult as an educator. He has taught financial concepts in Mexico, Singapore, Hong Kong and Taiwan. He also wrote the draft copy for a McGraw-Hill publication, Maverick Investing. Gordon hosts "In the Money with Gary Gordon" on San Diego's 1700 AM and writes commentary for the International Business Times as well as TheStreet.com.