Who'll Be The Next European Debt Threat?

Includes: EWI, FXE
by: Francis Ayensu

After EU leaders reached a final deal in the Greece debt crisis, focus has now shifted to Italy, as that nation’s debt has reached an alarming level, and Prime Minister Silvio Berlusconi is expected to resign after 2012 budget approval.

The stock markets have now focused attention on Italy's debt crisis. Global indexes have been mostly down lately, while rallying on any good news out of the eurozone. European stocks and indexes were down in early Thursday trading, with Stoxx Europe 600 index, German DAX 30 index, French CAC 40 index, FTSE 100 index and Italy FTSE MIB index all falling, and US and Asian markets showing a similar trend.

Italy is now next in line for a possible debt default (after Greece). Italy’s debt stands at 1.9 trillion EUR ($2.6 trillion) and exceeds that of Greece, Spain, Portugal and Ireland combined. Italy is the world’s third-largest bond market and the world’s eighth-biggest economy. It is the third-biggest economy within Europe. Italy’s default would be of greater consequence, not only for the eurozone and EU, but also for the global economy.

Greece's debt crisis is a forgone conclusion, and updates are expected on the formation of a unity government, with a new prime minister to lead the implementation of the bailout terms. However, as investors take relief from the Greece debt crisis, other EU "debt threat" members come into focus.

Italian government bonds have reached the 7% interest rate threshold considered to be the "point of no return” for hiking interest rates. Investors are more than worried of the government’s ability to honor its debt obligations. Italy has long been on a ratings watch list, and was already downgraded by Moody’s Investor Service and Fitch Ratings.

The eurozone is up against another challenge, and this time the whole EU existence is being called into question. EU leaders during the Greece bailout meeting agreed to expand the European Financial Stability Fund (EFSF) to $1.4 trillion (1 trillion EUR), but as Italian government debt surges due to hiking interest rates, doubts are raised over how EU leaders would react to this situation.

The feared risk of contagion is now set in place. As Italy debt crisis unfolds, other EU debt threat members will be of interest to investors and to the financial markets. Are we to contemplate the collapse of the eurozone?

The markets are volatile, and this is the right moment for trading. Investors should consider ETFs based on major European indexes such as Stoxx Europe 600 index, German DAX 30 index, French CAC 40 index, FTSE 100 index and Italy FTSE MIB index. A bet against EUR/USD would reap good investment.

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