ETF Trends
ETF Trends

The European sovereign debt crisis is reaching a potential turning point as leaders meet to discuss how to stop the problems from spreading from Greece to other embattled markets such as Italy and Spain.

“As another D-day looms on Thursday, we have few soothing words,” Suki Mann, senior credit strategist at Societe Generale SA in London, wrote in a note to investors. “Greece appears beyond repair, Italy is on the brink and the chances are that the euro might be no more very soon.” [Euro ETFs in Focus Before EU Meeting]

“The correlation of Italy to Spain has picked up recently. There are also some emerging signs that France could be affected. We expect the crisis to continue deteriorating and threaten the entire euro area,” says Jacques Cailloux, an economist at Royal Bank of Scotland.

A program or plan that guarantees the debt of all European Union countries facing risk is simply not a possibility anymore. The addition of Spain and Italy to the possibility of default within the EU countries is a disaster, as these economies are simply too large to be bailed out. Spain is the fifth largest economy in the European Union, while Italy is third. [ETF Spotlight: iShares MSCI European Financial Sector]

Italy is now paying the same rates as Spain to finance their debt, says Emese Martha for The Wall Street Journal, as the Treasury paid an average yield of 3.702% on the 12-month T-bills, compared with 2.695% at the previous auction June 14. Portugal, Ireland and Greece’s credit ratings have all been downgraded to junk level. [Italy ETF Sells Off With Stocks, Bonds on Credit Fears.]

ETFs being hit by the region’s debt turmoil include iShares MSCI Europe Financial Sector (NYSEArca: EUFN), iShares MSCI Italy (NYSEArca: EWI) and iShares MSCI Spain (NYSEArca: EWP).

The Italian bond ETNs PowerShares DB 3x Italian Treasury Bond Futures (NYSEArca: ITLT) and the PowerShares DB Italian Treasury Bond Futures ETN (NYSEArca: ITLY) are trading lower as the government bond market in Italy is under serious stress.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.