More Rumblings From Fitch - France's Outlook Downgraded; Six Other Sovereigns Put on Watch for Downgrade
Yesterday, Fitch Ratings downgraded the credit ratings of nine global financial institutions, including Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS), and Morgan Stanley (NYSE: MS). Today, the ratings agency is addressing European sovereigns. Fitch affirmed France's AAA rating, but lowered its outlook to "negative" from "stable," indicating that there is a 50 percent chance that the country could lose its perfect credit rating in the next two years.
The firm also placed its ratings on six other Eurozone nations on watch for downgrade. Included in this list are Spain, Italy, Belgium, Slovenia, Ireland and Cyprus. Fitch already had a negative outlook on these countries, and today's move sets the course for downgrades in the next 3 months. Explaining the move, Fitch said that a "comprehensive solution" to the EU's debt crisis is "technically and politically beyond reach."
Addressing France specifically, Fitch said that the likelihood of increased liabilities arising from a worsening economic and financial situation in the Eurozone has materially increased, adding that, in its view, France is the most exposed to further stresses in the region relative to its credit rating. The ratings firm said that it does not foresee resolving the negative outlook until 2013 in the absence of a major shock.
In an e-mailed statement, Fitch said that a particular concern regarding the European debt crisis is the absence of a credible backstop. “In Fitch's opinion this requires more active and explicit commitment from the ECB," the statement read. Earlier this month, Standard & Poor's put the long-term credit ratings of 15 Eurozone sovereigns on negative watch.
Bullish:
Traders who believe that European sovereign debt fears are overblown might want to consider the following trades:
- Buying an ETF that tracks the performance of European stocks such as the Vanguard MSCI Europe ETF (NYSE: VGK).
- Picking up shares of European banks which have been beaten down mercilessly. Examples of stocks that trade on American exchanges include Barclays (NYSE: BCS), Credit Suisse (NYSE: CS), UBS (NYSE: UBS), Deutsche Bank (NYSE: DB) and Banco Santander (NYSE: STD).
- Buying U.S. financial stocks which remain very sensitive to the outlook in Europe. Examples would include Bank of America (NYSE: BAC), Citigroup (NYES:C), Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS).
Traders who believe that Europe's sovereign debt crisis is only going to get worse may consider alternative positions:
- Shorting European and U.S. financial stocks such as those listed above. This trade has been a home run in 2011.
- Buying put options on the Vanguard MSCI Europe ETF (NYSE: VGK).
- Purchasing an inverse ETF such as the ProShares UltraShort MSCI Europe ETF (NYSE: EPV) which rises when European stocks fall.
