(FORTUNE Magazine) – Talk about a double whammy. For weeks investors have been pummeling Ford stock, which is down 55% since May, partly on concerns about its underfunded pension plan. But now the company's bonds are being pounded too. And that could make CEO Bill Ford's hope for a turnaround a whole lot dimmer.

Most of Ford's impending woes boil down to a kind of financing death spiral. It gets complicated, but here's how it works: When bondholders suspect a company's situation is deteriorating, they worry they won't get paid. To compensate for the increased risk, they demand a higher return, or "yield." So although Ford's bonds still technically carry an investment-grade credit rating (at least as of presstime), their yields resemble those of junk bonds.

And because of rampant 0% financing, Ford's financing arm has a ton of bonds outstanding: a hefty $157 billion in debt, $23 billion of which must be renewed in 2003 alone. The problem is, Ford is "barely covering" its interest expense today, notes Sean Egan, managing director of credit-rating firm Egan-Jones Ratings. Any borrowing cost increase could "push them over the edge."

To keep costs down, Ford has resorted more and more to "securitization," which entails bundling up consumer car loans and issuing interest-bearing securities to institutional investors (these are guaranteed by the car loans). For investors these "asset-backed securities" are a fairly safe choice because they are secured by specific assets. But the more Ford securitizes, the higher the return ordinary bondholders will demand. And that, say credit watchers, effectively places a limit on the company's ability to tap into low-cost financing, a must in the car business.

So if Ford can't borrow cheaply, it's going to be at a serious disadvantage to GM (for more on that company, see "GM's Slow Leak"). According to Lehman Brothers, Ford Motor Credit's average borrowing cost is already about one percentage point higher than GM's. And the more it costs Ford to borrow money to make loans, the less Ford makes on each car sold with 0% financing.

Ford insists that the market is overreacting. Spokesman David Reuter points out that the company is sitting on about $25 billion in cash to cushion it from a hike in its borrowing costs. But just how long that cushion will last is debatable: Free cash flow at the company's automotive arm is negative, and if car sales slow in 2003, the situation could be dire. "This company is not going to get turned around tomorrow or next year," says Glenn Chin, an auto analyst at Lehman Brothers. Turnaround? Suddenly that plan has taken a backseat to a new goal: survival.