Trouble Awaits Italy ETF

May.25.11 | About: iShares MSCI (EWI)

By Jason Raznick

All of the other PIIGS have already been through their share of trials and tribulations. Some of those problems are still ongoing and the European debt crisis may be set to claim Italy, the "I" in PIGS, as its next victim.

To its credit, Italy has not been slammed the way its PIGS brethren have been thus far, but that may change as Standard & Poor's is mulling a credit rating cut. That's not good news for global equity markets in the near-term

Portugal and Greece are one thing, well two, but you get the meaning. Italy is a whole other ball of wax. Italy was the tenth largest economy in the world last year, according to the International Monetary Fund. That's way bigger than Greece or Portugal and a fair bit larger than Spain.

S&P did affirm Italy's A+ rating over the weekend, but cut its credit rating outlook to "negative" from "stable," which could mean a ratings cut is on the way. Making matters worse is the fact that the ever-volatile Italian government recently lowered its GDP growth forecasts for 2011 and 2012.

Prior to the S&P report coming to light this weekend, the iShares MSCI Italy Index Fund (NYSEARCA:EWI) was already in a Greece-induced tailspin tumbling from its 52-week high at $20.15 in late April to $18.11 at Friday's close.

Italy is still in better shape compared to some of its peers, even with a debt load that is 120% of GDP. Italy's budget deficit was 4.6% of gross domestic product last year, lower than that of France and less than half of Greece's shortfall, Bloomberg reported.

Still, that probably won't be enough to stem the tide of near-term declines in EWI. A violation of support at $18 probably takes EWI to the 200-day moving average at $17.39.

For you odds makers out there, the negative outlook implies a one-in-three chance that Italy's ratings could be lowered within the next 24 months, Bloomberg reports. And if it's odds you crave, they don't look for EWI in the near-term.

Of course, all these factors could be ignored if one so chooses. Even with that, it cannot be ignored that Eni SpA (NYSE:E), Italy's largest oil company and EWI's top holding with a weight of nearly 19%, has been in a major slide thank to declining oil prices. That's another way of saying there are more reasons to stay from EWI than there are to get involved.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.