Daily Gains Letter

Has Hope Run Out for the Eurozone?

By for Daily Gains Letter |

Has Hope Run Out for the EurozoneThe economic slowdown in the eurozone continues to take a toll on the global economy. It’s causing major economies like China to suffer severely due to anemic demand. Sadly, looking ahead, there’s really no light at the end of the tunnel. Despite the bailouts and the European Central Bank (ECB) taking a tougher stance, countries at the epicenter of the crisis continue to suffer and show dismal economic data, and others are starting to follow their lead towards economic scrutiny.

The Bank of Spain, the central bank of the fourth-biggest economy in the eurozone, reported that the total amount of bad loans in the country had increased to 167.1 billion euros in April from 162.3 billion euros in March. Month-over-month, the amount of bad loans in the Spanish economy has increased by 2.9%. (Source: “Spain’s mortgage crisis lingers on as bad loans soar,” Deutsche Welle, June 18, 2013.)

The ratio of bad loans to all the credit in the country increased to 10.87% from 10.47%. This means that out of every 100 loans in Spain, almost 11 were considered “bad” or default loans.

The situation in Italy, the third-biggest economic hub in the eurozone, is very similar. The Italian Banking Association reported that bad loans in the country increased by 2.3 billion euros to 133 billion euros from March to April. Year-over-year, the bad loans in this eurozone country have grown 22%, making up 3.5% of the total loans. (Source: “Bad loans at Italian banks still growing in April,” Reuters, June 18, 2013.)

What’s even more troubling is that industrial production in the eurozone is declining. It decreased by 0.6% in April from the same period a year ago. Over the course of the year, from April 2012 to April 2013, production of durable consumer goods in the eurozone has plunged by 6.2%. Industrial production in countries like Finland has declined by 10.2%, and in Italy, it has fallen 4.6%. (Source: Eurostat, June 12, 2013.)

Unemployment in the eurozone has also become a major problem. In April, 19.3 million individuals in the common currency region were out of work. The unemployment rate stood at 12.2% in April—an all-time high—compared to 12.1% in March. (Source: “Euro area unemployment rate at 12.2%,” Eurostat, May 31, 2013, last accessed June 19, 2013.)

Looking at all this, what seems clear is that it will take a very long time for the economic wounds in the eurozone to heal. Consider the U.S. economy for a moment: the economic conditions in the country still haven’t returned to normal since the housing bubble burst in 2008. The eurozone will most likely be in a very similar situation.

With weakness still present in the region, investors can reap the rewards. Thanks to financial innovation, they can do this in different ways. One way investors may try to profit from is through an exchange-traded fund (ETF) called ProShares UltraShort MSCI Europe (NYSEArca/EPV). This ETF gives investors short exposure to different stock exchanges in Europe.

To profit from weakness in a specific country, investors may short the market with help from an ETF like iShares MSCI Italy Capped Index (NYSEArca/EWI). Taking a short position in this ETF allows investors to profit from the Italian stock market’s downside.

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