Currently, it has been forecasted that there is anywhere between a 60-80% Debt-to-GDP ratio in Spain. This means that sixty cents on every dollar of income in the country is tied to government bonds. That being said, this ratio is 20% less than that of Germany, France, or the USA, because of the way in which Spain has controlled most of its debt internally.
This essentially means that a default would both be fairly contained, and less likely. However, because of the size of the Spanish economy, the nominal prospects of a default are still very frightening. Most importantly, as a personal investor, we should be concerned for the value of our more volatile commodity holdings, and any internationally exposed financial companies.
Looking at how it is that inflating commodity prices were a major cause of the Spanish financial crisis, we can see how it is that a collapse in the country’s ability to access financing would hurt their ability to continue purchasing commodities in such high volumes. By removing Spanish demand from the market, we can realize a major decrease in the price of major products like oil and copper, because of the way in which we now need to find a new market to distribute to.
This means that risky oil producers, service companies, and pipelines have a higher risk associated with them today than they did yesterday, and will therefore have greater volatility, and generally lower pricing multiples. Because of the way in which many financial institutions rely heavily on the returns they receive from financing resource extraction, we might notice that some of the riskier financial firms won’t be able to make as strong a profit, because of the way in which they are not able to find as many extraction companies looking for debt.
Another investment to keep in mind while watching the Spanish crisis is your bond mutual fund. While it is not likely that many mutual funds will explicitly hold Spanish bonds at this point in time, it is important to keep in mind that the flight of capital from Spanish bonds will impact the global debt market itself. Safer bonds, and those bonds denominated in non-USD might see an increase in demand because of the way in which investors are vacating Euro-denominated Spanish bonds.
Alternatively, investors might seek out alternative debts of similar rating to the Spanish bonds before their downgrade from Moodies. This means that countries like the UK and Germany might see their bond prices increasing as well. Lastly, because of the flight from government bonds, we might see that the safest aspects of the corporate bond market will begin to appreciate to reflect their apparent isolation from political risks.
Understanding how it is that bond and commodity portfolios will be most volatile during this period of economic correction, it is important that a personal investor begin to look for alternatives that will provide them with capital safety for the next few years. Certified Deposits and highly diversified portfolios are in our best interest right now, alongside careful analysis and informed reasoning. Essentially, this means that your financial advisor is going to become ever more valuable to you over the next few years.
