How to Profit from China's Refusal to Bailout Europe
Chinese Premier Wen Jiabao crushed the hopes of many European optimists on Wednesday when he said while attending the World Economic Forum that it was up to European countries to "put their own houses in order" instead of hoping for cash rich China to bail them out.
Premier Wen was responding in part to rumors that China was in talks with Italy to start buying more Italian bonds, which would have helped Italy reduce its borrowing costs and possibly take some bite out of austerity measures promised by Italian Prime Minister Silvio Berlusconi. Berlusconi promised the financial reforms in order to get the European Central Bank (ECB) to start buying Italian bonds. Now it seems that China also wants to see more action from troubled Eurozone leaders before it backs them up financially.
As the yields of the bonds issued by troubled eurozone countries like Greece, Ireland, Portugal, Spain and Italy, have climbed higher, these countries have been looking for major investors willing to buy their bonds. However, with these countries' finances in shambles, no one wants to buy their bonds unless they come with the high yields. As the cost of borrowing goes up, it exacerbates the countries' troubled finances, creating a vicious circle.
The Chinese Premier joined the United States in criticizing European leaders for allowing the eurozone's financial crisis to escalate. US Treasury Secretary Tim Geithner is scheduled to voice the United States' concerns to his European counterparts when he makes an unusual appearance at the Economic and Financial Affairs Council (Ecofin) this week.
Investors have a many investment options to consider if they feel that Chinese Premier Wen Jiabao's refusal to bailout European leaders points to inevitable defaults in the eurozone.
When the European Central Bank started buying Italian bonds, the initial market reaction was just what the ECB and Italy had hoped for: yields on Italian bonds fell. However, as talk of a Greek default grew louder, yields on Italian bonds started to rise again. The take away from this is that if there is a Greek default, it's unlikely that the European Central Bank alone will be able to contain the crisis. The major concern is that Greece could be the first of many dominoes to fall.
When news broke earlier this week that China might start buying more Italian bonds, there was hope that the combined efforts of the ECB and China could help lower borrowing costs across Europe. If this were to happen, European leaders could focus their efforts on saving Greece without worrying as much about Italy, Portugal and the others. However, Chinese Premier Wen Jiabao's statement at the World Economic Forum showed that China is not eager buy billions of euros worth of debt that could soon be worthless.
If China is unwilling to become Europe's lender of last resort, there is even less hope that Greece and other Eurozone governments will be able to avoid default. Investors who see defaults on the horizon might want to take a look at the ProShares UltraShort Euro (NYSE: EUO) ETF. Many investors see the euro as doomed and a Greek default combined with China's reluctance to play savior to financially unstable governments could be contributing factors to the euro's demise.
The Swiss franc and the Japanese yen have grown increasingly popular as Europe and the United States struggle to get their finances in order. The CurrencyShares Swiss Franc Trust (NYSE: FXF) and CurrencyShares Japanese Yen Trust (NYSE: FXY) are two ETFs to look into for investors who want to move funds into safe haven currencies.
Investors who are feeling a bit more optimistic about Greece and the rest of the eurozone might want to consider the iShares MSCI Europe Financials (Nasdaq: EUFN) ETF. European financial stocks have taken a beating this week due to fears of a Greek default, a French banking crisis and the downgrade of two top French banks by Moody's Investors Service. However, if Greece avoids default and concerns about French banks' liquidity turn out to be over blown, the current market dip could be a great buying opportunity.
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Tags: China, ecb, Ecofin, Economic and Financial Affairs Council, European Central Bank, Greece, ireland, italy, Japan, Moody's Investors Service, portugal, Silvio Berlusconi, spain, Switzerland, Tim Geithner, United States, Wen Jiabao, World Economic Forum
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