Forget Oil; This Is What You Should Really Be Worried About

And you thought the rising cost of putting gasoline in your car was the biggest worry facing your wallet -- think again! Investors have closed their eyes and attempted to sweep one of the largest financial meltdowns in history under the rug, hoping that if they don't see it, then it must not exist. Well, don't look now, but 10-year bond rates in Europe are creeping dangerously higher yet again.

At the height of the European credit crisis last May, Greece's 10-year bond rates boiled over 12%, while Ireland and Portugal, two other debt-troubled countries, danced around 6%. When the crisis was averted with a 110 billion euro bailout coming from multiple European Union members, bond rates dove and investors brushed off the problem as solved. Here's the newsflash: The problem isn't solved. In fact, it's far from solved.

Despite austerity packages designed to rein in expenses and collect greater revenue from taxation, many of the EU's most troubled nations are still running dangerously large deficits. Ireland could actually be a greater problem than Greece. Ireland has roughly 300 billion euros in non-bank debt, and the country's 10-year bond rate has jumped to 9.4%. Consider this -- in 2010 Ireland only collected 31 billion euros in tax revenue but may be forced to pay 25 billion euros in just interest on its existing debt. This doesn't even factor in its other government expenses. Furthermore, Ireland's deficit as a percentage of gross domestic product is higher than any other EU member.

Greece is in just as dire a situation. Even with very stringent austerity measures and EU funding, the nation has nearly 80% of its debt due over the next eight years. Greece's tax revenue simply pales in comparison to the 10-year 12.3% interest rate it may have to pay on future debt offerings. The figures simply don't add up, and at this rate the country may never get out of the mess it's in.

Portugal's 10-year bond has risen more than 7%, Spain is well over 5%, and Italy is approaching 5%, all considerably higher than they were at the height of the EU credit crisis and perhaps a signal that big problems are ahead.

One way to protect your money is potentially to avoid banks that are highly leveraged to these troubled countries. Allied Irish Banks (NYSE: AIB  ) , Bank of Ireland (NYSE: IRE  ) , and the National Bank of Greece (NYSE: NBG  ) have all received bailouts in order to stay solvent, but that hasn't stopped them from hemorrhaging losses from a slew of bad assets still on their books. Non-Irish or non-Greek banks are also at risk. French giants BNP Paribas and Societe Generale, as well as Royal Bank of Scotland (NYSE: RBS  ) are extremely susceptible to downside earnings risk because of their large asset ties to Ireland and Greece.

My advice: Avoid this situation with a 10-foot pole, but make sure to keep your eyes and ears open to this potentially developing crisis -- Round 2 -- in Europe.

What's your take on the state of the European Union? Am I blowing smoke or is this a pinata just waiting to burst? Share your thoughts below and consider following the stocks mentioned here and in your own portfolio with the easy-to-use My Watchlist.

Add Allied Irish Banks, Bank of Ireland, National Bank of Greece, and Royal Bank of Scotland to My Watchlist.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He would gladly lend Greece money at 12.3% if they didn't have a default probability higher than the local paperboy. You can follow him on CAPS under the screen name TMFUltraLong. The Fool owns shares of National Bank of Greece. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that is crisis-free.


Read/Post Comments (6) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 08, 2011, at 12:04 PM, ems52082 wrote:

    This article is terrible fear mongering, I thought we all have seen past this. The situation will be solved, there will be slight haircuts potentially, but throwing all these banks in one pot and saying they are all the same is not an intelligent assesment at all. Why can't I just say that all home loans in the US are weak, no one can afford to pay the ARM's, so that means that the US will go bankrupt, under this author's logic that could happen as well. Take that a step further, this means marshall law will be in place. Don't listen to any of these naysayers, this is a cycle, it will end, and those that remain patient will get rewarded. It is in Germany's interest to keep this union together, and they will throw keep throwing money at it that they probably stole from countries like greece years ago anyways! Articles like this will get traffic for ad revenue.

  • Report this Comment On March 08, 2011, at 1:19 PM, waveonshore wrote:

    I find it hard to believe that the EU will not deal with the issues in Greece and in Ireland in a way that satisfies the markets and also forces tough but doable reforms on these members. In America we tend to view our way as the only and best way of doing anything. The Europeans are not stupid and their approach to debt issues may reap better rewards long term than the stimulus spending we used.

    I think the prospects for Bank of Ireland are good because of the economic growth I see because of a young, educated workforce. The National Bank of Greece has extensive operations outside Greece and in areas showing signs of rapid growth and development i.e. Turkey.

  • Report this Comment On March 08, 2011, at 4:41 PM, ems52082 wrote:

    All of the sudden the media has grown tired of reporting on middle east unrest, and now the focus is back on europe. Will Germany stop bailing itself out? I am willing to bet against it, and will double my position in NBG tomorrow. When there is fear there is opportunity.

  • Report this Comment On March 09, 2011, at 1:21 AM, Fliujniligui wrote:

    What is the greatest shame is that one year ago, fools sent a team to Greece. NBG was near 3-4$ and that team said that default fears were overdone and recommended NBG.

    And now we see a column that says that the fools last year were probably totally wrong.

    Global Gains is a service you pay for, and looking at that, I am no longer willing to pay for it in the future.

  • Report this Comment On March 10, 2011, at 1:44 PM, mdioli wrote:

    Putting AIB and NBG in one basket is quite unprofessional. Indeed, both banks have strong ties with debt-laden nations, but there are *subtle* differences in their business environment. Check out the capital structure of both, the history of earnings, the history of equity issuing.

    I agree that Europe indebtedness is a larger mess then we thought, but I expect from Fools service a bit of home work to be done before hitting the 'Publish' button.

  • Report this Comment On March 11, 2011, at 5:44 PM, malcarada wrote:

    Fool.com is a big contradiction, now they say do not buy AIB and 5 days ago they said BUY/WATCH AIB:

    http://www.fool.com/investing/general/2011/03/04/a-blessing-...

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