As Europe comes to grips with its debt problems, investors are taking a closer look at Italy’s situation and they don’t seem too pleased. It’s led to jittery investors selling off Italy’s exchange traded fund (ETF), lest they get caught in the maelstrom.

After the brouhaha with Greece’s rather large deficit problem, people have taken a higher interest in other European countries and noticed that the currency swaps Greece used to enter into the common currency was disconcertingly similar to Italy’s situation, comments Don Dion for TheStreet.

Furthermore, Italy’s municipal governments also utilized derivatives. All together, 519 municipalities used derivatives contracts that resulted in almost a billion euros, or $1.35 billion, in losses. However, it wasn’t the fact that they lost that much money, but more about the fact that they used the negatively perceived derivatives.

This week, Columbia economics Professor Robert Mundell, credited for laying the intellectual groundwork for the creation of a common currency, stated that Italy is the greatest threat to the euro since Italy makes up 25% of the eurozone debt. Many haven’t scrutinized Italy since its budget deficit isn’t far out of bounds of the Masstricht Treaty, which limits annual deficits to 3%, and no one is considering a sovereign default or banking crisis. [ETFs Hit By a Weakening Euro.]

Nevertheless, investors have been selling Italy’s ETF iShares MSCI Italy Index (NYSEAca: EWI), and over the past three months, EWI has become the second-worst performing Europe ETF. The fate of the ETF is greatly tied to the outcome of Greece’s problems and the weakening euro only exacerbates the situation, says Dion. [Italy ETF: Forecast for Growth, But Danger Lurks.]

For more information on Italy, visit our Italy category.

  • iShares MSCI Italy Index (NYSEAca: EWI)

  • CurrencyShares Euro Trust (NYSEAca: FXE)

Read the disclaimer, as Tom Lydon is a board member of Rydex|SGI.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.