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With Greece struggling to gain control of its financial situation, many investors have been wondering which of the relatively weak European economies would become the next problem area. It appears that they now have an answer, as Fitch Ratings lowered Portugal’s sovereign debt rating to AA- from AA with a negative outlook. The agency cited Portugal’s “significant budgetary underperformance in 2009″ and said the government’s deficit last year had risen well above its September forecast of 6.5% of GDP, to 9.3%. “Too much time has been spent following the affairs of Greece,” said Cantor Fitzgerald’s chief global equity strategist Stephen Pope. “It is as though blinkers were donned to the extent that other internal euro-zone weakness were allowed to slip off the radar screen.”

Spanish Markets Are Sinking After Trouble In PortugalPortugal will likely have to drastically cut its budget in order to keep its deficit under control and to keep the external debt to GDP ratio under 100%. Hopefully, the country will not experience Greek-style social upheaval and will be able to cut expenditures without increased turmoil, which could help to boost markets in neighboring economies. The news suggests that the trouble in the Eurozone is far from over, as the currency plunged to a fresh ten month low against the greenback in Wednesday trading.

While many investors had hoped the sovereign debt crisis would begin and end with Greece, it appears as if many struggling countries will not be so fortunate. Despite the ongoing weakness, many investors are thankful that the issues have been contained to small markets thus far and have not impacted large economies such as Italy or Spain, which could do some serious damage to the euro. Moreover, the weakness helps large exporters in Europe such as Germany, since their goods are now cheaper when converted to foreign currencies (See Five ETFs For A Weak Euro).

Spain ETF Slides

While there isn’t a Portugal ETF available to U.S. investors, the iShares MSCI Spain Index Fund (EWP) has been greatly affected by the bad news from its neighbor. The ETF sunk almost 3% in Wednesday morning trading and it has struggled all year due to rising unemployment (now approaching 20%), a sluggish economy, and a bearish outlook on the future of the euro zone. Thus far in 2010, the fund is down more than 13.5%, by far the weakest performer in our Europe Equities ETFdb Category. EWP focuses heavily on three sectors; financials (43.13%), telecommunication (18.94%), and utilities (12.26%) and it holds 29 securities. Among its top holdings are Banco Santander (STD) (23%) which was down close to 4.5% in Wednesday trading and Telefonica SA (19%) which was down close to 2% on the day.

EWP

Disclosure: No positions at time of writing.

Source: Spain ETF Sinks After Portugal Downgrade