Skip to Content
Stock Strategist Industry Reports

European Banks Trade on Sovereign Debt Fears

Spain is the most important domino.

Mentioned: , , , , , , , , ,

Just as the U.S. Federal Reserve was winding down its quantitative easing program at the end of March, we were harboring concerns about how much higher U.S. mortgage rates might reset with such a large buyer stepping back from the market. During the month of April, long idling but persistent rumblings regarding sovereign credit concerns around peripheral EU countries quickly grew louder, as a different link turned out to be the weakest in the global credit market chain. In the ensuing months, the cost of capital rapidly reset higher for European countries perceived to face the weakest combined debt/deficit/economic pictures, most prominently Greece, Portugal, and Spain. Based on market action, it appears that there are also some lingering concerns about Ireland, Italy, and the U.K.

It is somewhat of a chicken or egg argument about whether some of these countries potentially faced solvency issues that caused the debt markets to react so negatively or vice versa. What we find undeniable is that a rapid reset higher in the cost of credit for already troubled countries increased the odds of a bad outcome for any particular country. This situation closely mirrors what happened in the U.S. with its most financially troubled households. When the cost of (and access to) mortgage and credit card debt quickly reset in adverse fashion, the already high odds of default jumped overnight.

Matthew Warren does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.