As Europe comes to grips with its debt problems, investors are taking a closer look at Italy’s situation and they don’t seem too pleased. It has led to jittery investors selling off Italy’s ETF, lest they get caught in the maelstrom.
After the brouhaha with Greece’s rather large deficit problem, people have taken a higher interest in other European countries and noticed that the currency swaps Greece used to enter into the common currency was disconcertingly similar to Italy’s situation, comments Don Dion for TheStreet.
Furthermore, Italy’s municipal governments also utilized derivatives. All together, 519 municipalities used derivatives contracts that resulted in almost a billion euros, or $1.35 billion, in losses. However, it wasn’t the fact that they lost that much money, but more about the fact that they used the negatively perceived derivatives.
This week, Columbia economics Professor Robert Mundell, credited for laying the intellectual groundwork for the creation of a common currency, stated that Italy is the greatest threat to the euro since Italy makes up 25% of the eurozone debt. Many haven’t scrutinized Italy since its budget deficit isn’t far out of bounds of the Maastricht Treaty, which limits annual deficits to 3%, and no one is considering a sovereign default or banking crisis.
Nevertheless, investors have been selling Italy’s ETF iShares MSCI Italy Index (NYSEAca: EWI), and over the past three months, EWI has become the second-worst performing Europe ETF. The fate of the ETF is greatly tied to the outcome of Greece’s problems and the weakening euro only exacerbates the situation, says Dion.
- iShares MSCI Italy Index (NYSEAca: EWI)
- CurrencyShares Euro Trust (NYSEAca: FXE)
Read the disclaimer, as Tom Lydon is a board member of Rydex|SGI.
Max Chen contributed to this article.