Has the European Debt Crisis Reached a Tipping Point?

Video Transcript

Hi, this is JR Crooks for Uncommon Wisdom Daily.

Over the past week or so, there have been some very troubling developments in the European sovereign-debt crisis that make me think the situation could come to a head sooner than most people think.

First of all, Greece is rapidly sliding down the path toward exiting the euro zone entirely. The International Monetary Fund reportedly may refuse to give the country any more money to help it meet its debt obligations. And if the IMF pulls out, some core euro-zone members may not be far behind.

If that happens, Greece may choose to abandon the common currency. And that would open the door to a complete dissolution of the euro zone.

Two of the union’s bigger economies — Spain and Italy — are also in big trouble. Several Spanish regions have said they’ll probably need to request bailout funding from the EU, and the same might be true of up to 10 regions of Italy, including Sicily.

Their fiscal woes have prompted a surge in borrowing costs in those two countries. The yield on Spain’s 10-year government bond is already well-above 7%, the threshold at which it becomes extremely difficult for a county to service its debt. And the interest rate on Italy’s benchmark note is approaching that level as well.

The concerns about the viability of the two countries are also showing up in the stock markets. Spanish stocks gave up about 12% in just two trading sessions on Friday and Monday. The governments of Spain and Italy seem to think the sell-off is due to speculation, so they moved to ban short-selling.

If they’re right, they may be able to stop or slow down the slide. But I suspect that the problems go much deeper than speculation. I think investors are finally realizing that European officials are powerless to stop the debt crisis and put the euro-zone economy on the path to a real recovery.

That’s why I’m recommending that you stay far away from any European investments. And for those of you who are comfortable with a little more risk, you can even make some aggressive bets to benefit from the deep downturn that is certainly coming.

One way to do that is by targeting the euro currency, with an inverse ETF like the ProShares UltraShort Euro Fund, symbol EUO. It’s designed to go up 2% for every 1% the European currency falls against the U.S. dollar.

You could also sell short or buy put options on exchange-traded funds targeting European stocks, such as the iShares MSCI Italy Index Fund, the iShares MSCI Spain Index Fund or the iShares MSCI Germany Index Fund.

Looking at all the evidence, and barring a major concession from Germany towards spearheading fiscal union initiatives, I think the euro zone has reached a tipping point, and that it’s only a matter of time before the monetary union dissolves. And I’m convinced that the economic and financial contagion from the debt crisis will be impossible to contain, leading to a major global crisis.

So as investors, we have to prepare ourselves for the worst.

I’m JR Crooks for Uncommon Wisdom Daily. Thanks for watching.