PIIGS Debt Woes: Country Stock ETFs Are Also Suffering

by: Gary Gordon

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:

European Country Stock Funds in the Sovereign Debt Blow-Up
Approx YTD%
iShares Sweden (NYSEARCA:EWD) -6.2%
iShares Belgium (NYSEARCA:EWK) -7.0%
iShares Switzerland (NYSEARCA:EWL) -8.5%
iShares France (NYSEARCA:EWQ) -13.3%
iShares Germany (NYSEARCA:EWG) -13.4%
Ireland Fund (NYSE:IRL) -11.8%
PSI 20 Portugal Index -14.5%
iShares Italy (NYSEARCA:EWI) -14.9%
iShares Spain (NYSEARCA:EWP) -18.5%
Athens Greece Stock Exchange Index -18.6%

In truth, the entire eurozone is being hit hard, not just by the sovereign debt blow-up, 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 7-month low for the euro versus the U.S. dollar.

Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.