Moody's Warns That All EU Debt Is Risky

Moody's Investors Service sounded the alarm early on Monday morning that the credit ratings of all members of the European Union were now at risk because of the financial crisis that has been escalating in Europe for more than a year. The ratings agency said that the financial crisis that has already seen Greece, Ireland and Portugal receive bailouts to prevent defaults will worsen the longer it lingers. Moody's said that while it does not expect widespread European defaults, a scenario in which multiple defaults occurs is "no longer negligible" and will grow increasingly likely as long as the European financial crisis continues. Moody's said that there is a growing possibility of "a series of shocks, which may lead to more countries losing access to market funding for a sustained period and requiring a support program.” Italy and Spain are the latest countries to see their borrowing costs surge higher as investors grow weary of having exposure to any eurozone member with even a hint of financial turmoil. Although the European Central Bank (ECB) has stepped in to buy Italian and Spanish bonds, that hasn't stopped the yields on those bonds from climbing higher. Without the intervention from the European Central Bank, Italy and Spain could already be in a position similar to that of Greece. The European Union has been struggling for over a year to keep small countries like Greece from defaulting but if a country with a much larger economy like Italy needed a bailout, it could strain the finances of the entire European Union. As countries with triple A ratings like Germany and France increasingly shoulder the burden of Europe's financially troubled countries, Moody's says that even their stellar credit ratings could fall. France already received warnings from Moody's Investors Service and Standard & Poor's last month that its coveted triple A rating is in danger, in part because of the French government's plans to recapitalize the banking sector. Moody's warned that by recapitalizing the banks, the French government was simply shifting risk from the banking sector to the taxpayers.

Traders who believe that the warning from Moody's Investors Service is an overreaction to current events might want to consider the following trades:

Traders who believe that Moody's was right to issue the warning may consider an alternate position: