How to Profit From Moody's Downgrade of Italy
Moody's Investors Service on Tuesday downgraded its ratings of Italian bonds to A2 with a negative outlook, down three levels from the previous rating of Aa2. Moody's Investors Service went on to say that all but the highest rated eurozone countries were also under pressure and could face future downgrades as well. The downgrade comes less than a month after ratings agency Standard & Poor's downgraded Italian bonds.
Prime Minister Silvio Berlusconi has promised that the austerity measures that he is promoting will reduce Italy's deficit but the combination of higher taxes and reduced government spending are unpopular with the Italian people. Prime Minister Berlusconi's efforts have been further weakened because he faces a number of sordid legal problems involving corruption and prostitution.
Even if Berlusconi's austerity measures are allowed to continue, Italy's slow economic growth was also of great concern to Moody's. If Greece is anything to go by, Berlusconi's austerity measures could actually worsen Italy's financial situation and push Italy into recession.
Moody's Investors Service's downgrade of Italy and warning that other eurozone countries could also be downgraded will put further pressure on the euro. The finances of troubled eurozone countries continue to face scrutiny, with many investors believing that a Greek default is inevitable.
While Greece is having problems simply paying its bills, the main concern for many other eurozone countries like Italy is slow economic growth. While none of these countries face an impending fiscal doom like Greece, Moody's Investors Service believes that they will run into problems if government spending continues to grow faster than the underlying economies. Such sentiment from ratings agencies and investors tends to drive up the borrowing costs of these countries, making the possibility of a default more likely.
While it's too soon to anticipate a default by any other eurozone country than Greece, the effects of austerity measures aimed at reducing fiscal deficits is plain to see. Eurozone countries were already experiencing slow economic growth but austerity measures that include reduced government spending and increased taxes are undermining any efforts to promote economic growth.
Investors can expect the eurozone's economic growth to be sluggish as long as governments like Greece, Italy and Spain focus their efforts on lowering their fiscal deficits. The ProShares UltraShort MSCI Europe (NYSE: EPV) and the Market Vectors Double Short Euro (NYSE: DRR) are two ETFs worth considering during the current economic environment. As long as there is speculation that ratings agencies like Moody's Investors Service will continue to downgrade eurozone debt ratings and these countries react to such speculation by implementing more austerity measures, eurozone economies will be operating under a cloud.
Investors who feel that the Moody's warning that more eurozone downgrades are possible might want to move funds out of the euro and into safe haven currencies like the Japanese yen and the Swiss franc with the CurrencyShares Japanese Yen Trust (NYSE: FXY) and the CurrencyShares Swiss Franc Trust (NYSE: FXF). Although Switzerland has vowed to keep the value of its franc from appreciating too much relative to the euro, its past efforts to do the same weren't very successful and proved to be expensive. With all the bad news coming from much of Europe, the Swiss might find that they aren't able to combat strong market forces. The Japanese are also unhappy about a rising yen but have promised not to take drastic step like the Swiss.
Other investors might see this as a good buying opportunity to invest in Europe or they could wait until the next round of downgrades makes investing in Europe even less attractive to most investors. Investors who bought ETFs like the iShares MSCI Italy Index Fund (NYSE: EWI), the iShares MSCI Spain Index Fund (NYSE: EWP) or iShares MSCI France Index Fund (NYSE: EWQ) could profit handsomely when European governments shift their focus away from austerity measures and make economic growth their priority.
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