How to Profit From Hungary's Downgrade to Junk Status

After having its credit rating lowered to junk status, Hungary is the latest European country to see its borrowing costs climb higher. The country was downgraded by Moody's Investors Service from Baa3 to Ba1 with a negative outlook a week after it had to ask the International Monetary Fund ("IMF") for help. As the Hungarian forint continued to fall against the eurozone's euro and the yields on Hungarian bonds climbed to unsustainable levels, the Hungarian government sought help from the IMF. Although he's asking the International Monetary Fund to save his country from a financial collapse, Hungarian Prime Minister Viktor Orban has said that he doesn't want any strings attached to any funds he receives from the IMF. The Hungarians have also characterized the Moody's downgrade as a financial attack on Hungary itself. The downgrade by Moody's Investors Service is sure to increase Hungary's borrowing costs and make it much more difficult for the country to raise funds from international investors. American financial institutions have been shying away from European sovereign debt and unlike eurozone members like Italy and Spain, Hungary can't count on the European Central Bank (ECB) buying up its bonds to keep their yields down. While it's not a eurozone member, Hungary's fate now seems linked to troubled countries like Greece, Italy and Spain. Without outside help, Hungary is at risk of a default. The stance of the Prime Minister Orban doesn't bode well for the chances of the Hungarian government passing austerity measures like the ones passed in Greece in order to avert a default.

Traders who believe that Hungary is too small of a country for the non-eurozone member's problems to affect the eurozone might want to consider the following trade:

Traders who believe that Hungary's downgrade to junk status will further hurt investors' perceptions of Europe may consider an alternate position: