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On July 26, 2012, European Central Bank President Mario Draghi made his now famous promise to do "whatever it takes" to save the euro. That put an end to soaring yields on Spanish and Italian government debt that threatened the very existence of the euro.

And it set off a huge, sustained rally in European stocks and bonds that has only recent faltered.

I bring this up for two reasons:

● First, I think that Draghi's promise is going to be challenged and challenged hard -- with its very real flaws and limits exposed to scrutiny by the financial markets -- over the next few months.

● Second, this renewal of the eurozone debt crisis has the potential to take the shares of some very good European companies -- companies you'd like to own for the long term -- down to bargain levels again.

This column has two purposes: first, to run through the reasons i think we're about to see a new round in the euro debt crisis, and second, to give you a list of 10 European stocks that I'd snap up if their prices fall in a new round of the crisis.

The eurozone mess revisited

Let me take you back to the scary days of July 2012. Yields on Spanish 10-year government bonds climbed to 7%, and then kept on climbing. Analysts and economists joined in daily hand-wringing, saying that at above 7%, the burden of debt on a struggling Spanish economy was unsustainable. Spain seemed headed to bankruptcy, a bailout, a departure from the eurozone or a combination of those.

Italy wasn't far behind. The yield on Italian 10-year government debt hadn't reached 7%, but, at 6.597%, it was clearly headed in that direction.

Jim Jubak

Jim Jubak

That raised the hand-wringing to another level: The eurozone probably didn't have the resources to bail out Spain or Italy. It certainly couldn't handle a bailout of both.

Draghi's speech stopped that discussion dead in its tracks. The "whatever it takes" promise had credibility, because it followed on the central bank's huge long-term refinancing operation that provided 1 trillion euros (roughly $1.3 trillion) in cheap money to European banks. That move had shown that Draghi would act, and act big. When the July promise was fleshed out with a new Outright Monetary Transactions pledge that said the European Central Bank was prepared to buy unlimited amounts of government bonds of maturities of three years or less of any country in bond-market distress, the promised support was enough to turn financial markets around.

The yield on 10-year Italian government bonds -- which had peaked at 6.597% before Draghi's speech -- had fallen to 4.129% by Jan. 25. The yield on 10-year Spanish government bonds -- which had peaked at 7.498% -- fell to 4.904% on Jan. 10.

European stock markets recovered, too. The American depositary receipts of Spain's biggest bank, Banco Santander (SAN), climbed from $4.89 on July 24, 2012, to $8.81 on Jan. 25. In Germany, shares of car giant Volkswagen rose from 118.75 euros on June 27 to 186.75 euros on Feb. 2. Even a French consumer stock such as dairy maker Danone (DANOY) got into the act, rising from $11.33 on July 25 to $14.28 on Feb. 19. (Prices for the U.S.-traded ADR for Volkswagen, VLKAY, rose from $28.27 to a peak near $48 on the same dates.)

Back in trouble

Recently, though, some of the gloss has come off those gains. As of March 1, the yield on the Italian 10-year bond had climbed to 4.79% from 4.129% on Jan. 25. The yield on the 10-year Spanish bond had increased from 4.904% on Jan. 10 to 5.10%. Banco Santander ADRs are down 14.9% from their January high as of March 1. And shares of Danone are 3.7% lower than their February high.

What happened?

  • The Italian election resulted in a hung parliament, with Democratic Party leader Pier Luigi Bersani's coalition winning a majority in the lower house but with no party or coalition winning a majority in the upper house. As the days have ticked by since the Feb. 24-25 election, the chance that anybody will be able to put together a government has dwindled. That leaves Italy adrift for at least a month -- longer if the country needs new elections.
  • Projections from the World Bank and the International Monetary Fund have said that economies throughout the eurozone will continue to slow and that the growth projections used by Spain, Portugal and France to put together their deficit-reduction plans are now not only optimistic but also unrealistic. Countries that missed their budget deficit targets in 2012 now look likely to miss them again in this year.
  • The political reaction to the Italian election has served as a vivid reminder that European leaders are locked into a strategy of austerity, austerity and more austerity. That's especially problematic now because Italian voters rejected more austerity (and a good bit of past austerity, too) in the recent election, and because as economic projections go from bleak to bleaker, austerity seems more and more like a failed policy. If, because of their own internal politics -- including a Sept. 22 election in Germany -- leaders of Germany and the Netherlands remain locked into a position favoring austerity, then financial markets are about to see a replay of the Greek crisis. But this time, there are more chips on the table.
  • A budget crisis and the need for a bailout in Cyprus have again raised the specter of a country being forced to leave the euro.
  • And, finally, the Italian crisis has led some in the financial markets to read the fine print in Draghi's promise of unlimited bond buying. The European Central Bank promise had a big condition: A country had to make a formal request for a ECB bond-buying program to the European Stability Mechanism and agree to the conditions -- budget cuts, tax increases and economic reforms -- set by the eurozone's bailout fund. Italy currently can't meet those conditions because it doesn't have a government that can agree to anything. Spain has refused to make a formal application to the European Stability Mechanism because it doesn't want to give up control over its finances as Greece has had to do. With bond yields falling on Draghi's promise, Spain has felt comfortable doing nothing. In recent weeks, markets have again begun to wonder how long that's a viable position for the government of Prime Minister Mariano Rajoy.

The next steps

Where now?

Investors will get some clues from Draghi's news conference after Thursday's meeting of the European Central Bank's governing council. I doubt the central bank will do anything, which makes what Draghi says and how markets react to his words especially important.

We're witnessing a major test of the ability of rhetoric to control the eurozone debt crisis.

And then it's up to the financial markets to react to events -- the talks on a Cyprus bailout and the likelihood of continued chaos in Italy -- to decide how quickly we move back into a real crisis condition.

Italian 10-year yields have climbed by 0.67 percentage point from Jan. 25 to March 1. But considering that we're looking at a country with no real chance of putting together a government for at least two months, that move in bonds has so far been very muted. The fall in the euro against the U.S. dollar -- 4.6% from Feb. 1 to March 1 -- has been more pronounced, which leads me to think that bond market yields will continue to move higher (which means bond prices will move lower).

But I don't expect those moves to be smooth. Investors have competing financial crises in Tokyo and Washington to watch. The pound sterling is sinking as markets become increasingly convinced that London wants a weaker pound to help its economy. And I expect that Draghi's rhetoric hasn't yet lost all its power.

By July, I think we could see the euro debt crisis again in full flower -- driven by bad first-quarter economic reports and another round of midyear downgrades to economic projections from the International Monetary Fund, the World Bank and the Organisation for Economic Co-operation and Development.

If that timetable is right, I'd expect to see bargains on the stocks of great European companies in July and perhaps sooner as this crisis leads the market down in fits and starts.

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