Will These Bond Funds Star in a Greek Tragedy?
Some good funds hold debt from Greece and other financially shaky nations.
Greece hasn't typically been a country at the forefront of the world economy, but in recent weeks it has been making a lot of financial headlines. In late 2009, Greece announced that it had underestimated the size of its deficit, and then in early February of this year, fears began spreading that Greece might default on its sovereign debt (bonds issued by the Greek government), causing the cost of insuring that debt against default to skyrocket.
Although the immediate crisis eased when other European Union countries agreed to support Greek debt, the incident has put a spotlight on the problems of Greece and other debt-laden countries in the euro zone, especially Italy, Portugal, Spain, and Ireland. These five economies at the periphery of western Europe have been especially hard-hit by the financial crisis, and European authorities are now trying to help them stay fiscally sound without causing too many unintended consequences elsewhere. All this has put a strain on the euro, which all five of these countries use, and which has dropped in value relative to the U.S. dollar.
It remains to be seen exactly how widely this crisis will affect mutual fund investors; that depends on whether the problems can be contained to these few countries, or whether they're the tip of the proverbial iceberg, like the subprime mortgage crisis that emerged almost three years ago. We dug into our database to identify funds that could be directly affected--namely bond funds with exposure to bonds from Greece, Portugal, Italy, Ireland, and Spain. Of funds actively covered by Morningstar analysts, the following four, all of which are in the world-bond category, have the highest combined percentage of their bond portfolios in those five countries.
David Kathman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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