The PIGS Vicious Cycle: Downgrades and Debt Problems

Yields on Spanish, Greek and Italian bonds spiked on Monday, following continuing concerns over debt problems in the Eurozone, according to CNBC. Standard and Poor's decided to downgrade Italy on growth concerns. That may have contributed to the subsequent increase in Italian bond yields. Although the spike in yields makes sense for investors, it does not make Italy's situation any easier. Higher yields makes it more difficult for Italy to borrow, which only further reduces the country's fiscal outlook, which in turn may lead to even higher yields, which in turn may reduce the country's fiscal outlook further… On May 6th, Germany's Chancellor Angela Merkel verbally attacked "speculators" who she decried for profiting off of Greece's fiscal problems. Last year, Greece's Prime Minister George Papandreou expressed similar sentiments when he blamed speculators for making it more difficult for his country to borrow. So, are the rating agencies helping or hurting the situation? If their downgrades are driving an increase in yields, then that may be affecting the balance sheets of the European nations. However, perhaps it is best for the broader world market. After all, the rating agencies turning a blind eye to subprime mortgages is widely speculated as being a primary catalyst in the recent economic crisis. Traders looking to play continued euro weakness may wish to consider ProShares UltraShort Euro EUO.