How to Profit From Moody's Downgrade of Spain
Eurozone optimists were dealt another blow when Moody's Investors Service downgraded Spain's credit rating two notches.
Moody's lowered Spain's debt rating to A1, down from the previous rating of Aa2. The Spanish downgrade will hurt Spain's ability to raise funds because the lower credit rating will likely drive up Spain's borrowing costs.
Moody's said that since the rating agency put Spain's credit rating under review in July, Spanish and European leaders have failed to come up with a credible solution to the financial problems facing Spain and several other eurozone members, problems which include a sovereign debt crisis and low economic growth. Moody's said that even after these problems have been dealt with it will take time to restore market confidence in countries like Spain.
The downgrade of Spanish debt followed Moody's warning to France that its credit rating was at risk of a downgrade. Recently, there has been a great deal of anticipation that European leaders will soon announce the details of a recapitalization plan to shore up troubled European banks, many of which are having difficulty obtaining short term financing. However, Moody's put France on notice that while a bank recapitalization plan could improve the health of Europe's banking sector, it would only be shifting risk away from banks to taxpayers.
Germany, the biggest and most important member of the eurozone, has already been seeking to deflate hopes of a quick fix to the eurozone's problems. German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble have both warned investors this week that an October 23 meeting of European leaders won't come up with a cure- all solution to Europe's financial woes.
Many investors feel that the latest downgrade of a eurozone member is another sign that the eurozone is doomed. On the one hand you have countries like Spain and Greece whose citizens are being forced to accept painful austerity measures that include tax increases and spending cuts, on the other you have countries like Germany and France whose citizens are being forced to shoulder the financial burden of the weaker countries until the austerity measures pay off some day in the distant future. Resentment of this situation is growing among both groups and despite European leaders' vows that the eurozone will be preserved, at this point it wouldn't take much for it to fall apart.
Investors who feel that the euro is doomed could move their funds into other currencies like the American dollar or the Japanese yen or even short the euro through ETFs like the PowerShares DB US Dollar Index Bullish (NYSE: UUP), the CurrencyShares Japanese Yen Trust (NYSE: FXY) and ProShares UltraShort Euro (NYSE: EUO).
There are a number of investments to consider for those who feel that the troubles facing Spain and the rest of the eurozone have already been priced into the market and that the recent downgrades and warnings from Moody's Investors Service and the other credit rating agencies are more reactionary than prescient. If the situation in Spain is reversed by the government or concerns over its financial health prove to be overblown, there are a number of Spanish stocks that could climb higher. For those who see the Spanish downgrade as a buying opportunity, Spanish stocks like Banco Santander (NYSE: STD) and Telefonica (NYSE: TEF) might be interesting investments. Each of these stocks is positioned to do well in the event of a Spanish turnaround.
Investors who are optimistic about Spain but would prefer the diversification provided by holding a wider range of stocks could also buy the iShares MSCI Spain Index Fund (NYSE: EWP) ETF. Owners of this ETF will be exposed to any upside for Spanish stocks, along with the risk reduction that comes with owning a basket of stocks.
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