Amidst the chaos in Japan and Libya, Europe has quietly been sorting itself out. Last week’s downgrade of Spanish debt by Moody’s reflects Spain’s denial about the status of its bank restructuring efforts. Even more disconcerting is the misplaced anger by Spanish government officials over the timing of Moody’s announcement, which came a few hours before the Bank of Spain released its own assessment of the situation. The BOS clearly had egg on its face, thinking recapitalization efforts of savings banks would set Spain back €15.2 billion versus Moody’s estimates of €40- 50 billion. That doesn’t even take into account a “more stressed scenario” which might put them as much as €110- 120 billion in the hole. I guess their credibility doesn’t matter anyway, since it flew out the window a year ago.
Moody’s had been warning of an impending downgrade since December. Instead of worrying about what they can’t control, such as an independent international ratings agency. Measures should be taken to rope in run-away regional governments, half of which are failing to meet standards outlined by the government of President Zapatero. Last year, 9 of the 17 regions in Spain were not able to meet the budget deficit standard of 2.4% of GDP in 2010. Moody’s recognizes that the Spanish do have a plan, but I expect another downgrade in the coming year primarily because of an inability to deal with this autonomy and an even more frugal budget deficit target of 1.3% of GDP. With all of this in mind, I am still going to tell you that the possibility of default by a Euro zone country such as Spain is minimal, simply because Merkel and company are done posturing and ready to rectify this crisis.
Confidence in Europe has been somewhat restored by these developments. Saturday’s news reflects that Europe as a whole is getting serious about tackling this issue, though there are some stragglers (read: Ireland). The move by European leaders to bolster the European Financial Stability Fund to €440 billion from €250 billion was met with praise. The agreement also marked a new openness by Germans and French to work with those that will heed their commands. It’s about time! Contrast Greece, who secured a lower interest rate on its previous bailout loans, against Ireland, whose defiance over a corporate tax increase denied them the same sweetheart deal. Austerity is still a tough pill to swallow and it is even tougher when it is being forced on you from above. Politics aside this crisis is finally moving toward some resolution. One outcome I’m eying is a resurgence of the Euro. Here are two different safe plays to digest: ProShares Ultra Euro ETF (ULE) tracks the Euro tightly and could soar if my hunch is correct. The Fidelity Leveraged Company Stock Mutual Fund (FLVCX) also looks good since it has greatly outperformed the Euro over the last year.