According to Bloomberg, European Union regulators hope jointly
issued bonds will finally quell the sovereign debt crisis that has
plagued the continent since early last year.
Details have yet to be worked out, but a joint eurobond offering
would essentially spread debt obligations and liabilities among all
the eurozoneâs member states. The idea is that a joint eurobond
would bring better financing to states in need, like Greece and
Italy, than would Greek or Italian bonds denominated in euros.
The only problem is that countries like Germany, which has the
largest economy in the eurozone, would be largely responsible for
the debt, and thus face higher borrowing costs than itâs normally
accustomed to. That probably explains Germanyâs opposition to the
European Commission plan.
That said, jointly issued eurobonds could be quite beneficial
for investors in the Rydex CurrencyShares Euro Trust
(NYSEArca:FXE). Though FXE investors have gained 7.68 percent
year-to-date, theyâve had to deal with considerable volatility. A
move to issue joint eurobonds may prove costly for Germany, but
would certainly put to rest any speculation that the sovereign debt
crisis could end the euro.
As of now, FXE is still susceptible to the news concerning
Europeâs sovereign debt problems. With restructuring agreements
not yet in place in Spain and Italy, investors still face a bumpy
ride. Itâs clear that addressing debt issues one country at a
time will certainly bring more volatility to the likes of FXE.
Investors in European equity ETFs may also stand to benefit
quite bit from a joint eurobond offering, in large measure because
of currency movements, which weâve talked about in the past.
Among the equity ETFs that would likely benefit from new jointly
issued eurozone bonds are the SPDR STOXX 50 (NYSEArca:FEU) and the
SPDR Euro STOXX 50 (NYSEArca:FEZ). Year-to-date, FEU and FEZ have
dropped 4.13 percent and 8.68 percent, respectively. A rally in the
euro resulting from a joint-bond offering would directly correlate
to better returns for investors in these funds.
Germany ETF Hangs In The Balance
However, one group of ETF investors that may stand to lose some
ground in a joint eurobond offering are those that have extolled
Germanyâs capacity to weather the global upheaval of the past few
years remarkably well.
Those holding the iShares MSCI Germany Index Fund (NYSEArca:EWG)
have some reason to be cautious. More than 18 percent of the fund
consists of consumer discretionary stocks. Should Germany find
itself even more responsible for the debt of euro member states,
thereâs no way to tell how that may affect German taxpayers and
therefore their capacity to spend discretionary income.
Obviously, this is purely speculation, but it isnât
far-fetched to assume that German taxpayers will face a greater
burden should joint eurobonds come into existence.
Even so, EWG could stand to gain from a rally in the euro,
particularly if jointly issued bonds end up stabilizing the
eurozone, thus preservingâeven enhancingâGermanyâs exports to
its neighbors in Europe.
At this point, all we can do is wait and see what happens as
Europeâs politicians try to pull together and hatch a more
comprehensive plan to right the ship. You can be sure, though, that
a definitive solution must be reached. Otherwise, the bumps in the
road are sure to get bigger.
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