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Europe is a world of hurt in foreign stock funds

If your foreign-stock mutual fund has been sinking like a stone, chances are it’s heavily invested in Europe.

Over the last few months, markets in Italy, Spain, France and elsewhere in Western Europe have suffered the heaviest losses of any major world region. The declines have been far worse than what most North American, Latin American and Pacific Rim investors have faced in their home markets.

But Europe may be primed for at least a short-term bounce, if it follows Wall Street’s lead. U.S. stocks rose Wednesday after eight straight down sessions.

Italia Measured from its high earlier this year the Italian market’s FTSE-MIB index (charted at left) had plunged 26.6% through Wednesday. Few other major markets worldwide have fallen as sharply in 2011. And Italy's loss this year follows a 13% drop in calendar 2010.

Spanish stocks aren't far behind Italy, down 18.7% from their 2011 high. Switzerland is off 18.3% and the French and Dutch markets both are down 16.9%.

By contrast, the U.S. Standard & Poor’s 500 index, at 1,260.34 on Wednesday, was down a modest 7.6% from its 2011 high reached in late April.

Also measured from their 2011 highs, South Korea’s main index is down 7.5%, while the Canadian market has fallen 10.2% and Mexico is off 10.9%. (All price changes are in local currencies.)

Even Japanese stocks have managed to hold up reasonably well after diving following the country’s horrid March earthquake. The Nikkei-225 index is down about 10% from its February high.

Western European markets have been hammered by the continent’s never-ending government debt crisis. Less than two weeks ago, the European Union agreed on a new bailout of Greece that asked investors to voluntarily forgive part of Greece's bond debts. One goal of the EU package was to “ring-fence” the wounded economies of Greece, Ireland and Portugal and boost confidence that debt-hobbled Italy and Spain wouldn't follow them in needing full bailouts.

But worries about Italy and Spain have mushroomed over the last week, driving up interest rates on Italian and Spanish government bonds and pummeling the countries’ stock markets.

Not surprisingly, bank stocks have led the sell-off in Europe this year. If the debt crisis isn’t contained, the banks -- which own massive amounts of European government bonds -- have the most to lose.

The European Central Bank will meet on Thursday, amid speculation that policymakers will launch a program to buy Spanish and Italian bonds in the open market in an attempt to push yields back down.

The yield on two-year Italian bonds fell Wednesday for the first time in nine sessions, easing to 4.57% from 4.63% on Tuesday.

Spanish two-year yields were unchanged at 4.54%. Spain will try to sell up to $5 billion in new bonds on Thursday.

-- Tom Petruno


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