For European investors, it’s been quite a week. On Tuesday, markets sank across the board as ratings firm Standard & Poor’s lowered its outlook on Portugal and cut Greece’s debt to junk status. Although many believed that the worst of the crisis was nearing an end with news that the IMF and richer euro zone members would be coming to Greece’s aid, it appears as if the troubles are deepening. Luckily for investors, the Greek and Portuguese markets are relatively small; their combined GDP is just over $550 billion, or roughly $200 billion smaller than the economy of the Netherlands. However, a number of other larger European countries, including Spain, Italy, and the U.K. are currently struggling under the weight of significant debt and many have been wondering which of these countries would be the next to suffer a crisis of confidence. That question was answered on Wednesday.
Spain’s debt was downgraded by Standard & Poor’s by one level to “AA” with a negative outlook one day after the firm lowered its rating on Greece and Portugal (see Europe ETFs Plunge On Debt Downgrades). This news sent the Spanish markets reeling for a second consecutive day, falling close to 2.5% in Wednesday trading after sinking 5% on Tuesday (see charts of EWP here). Although the Spanish economy is not nearly as indebted as Greece or its Iberian peninsula neighbor Portugal, the country has close to $300 billion in debt coming due this year, an amount almost equal to the entire Greek economy. Additionally, the country suffers from high trade deficits, which makes it even more difficult to pull itself out of its current hole (read What Every Investor Needs To Know About The Spain ETF).
Furthermore, Spain has one of the highest unemployment rates in the developed world, currently exceeding 20%. In addition to creating unrest and putting an extra strain on the country’s fiscal position, this extremely high unemployment rate makes any austerity measures implemented by the Spanish government likely to face severe backlash from the general populace. Spain truly finds itself in a precarious position going forward.
Thus far in 2010, the iShares MSCI Spain Index Fund (EWP) is the worst performing ETF in our Europe Equities ETFdb Category; EWP has lost 20% this year. EWP maintains significant holdings in Banco Santander and Telefonica, which combine to make up just over 42% of the fund’s total assets. The fund is heavily focused on financials, which make up 43.1% of the fund, and telecommunication firms, which comprise 18.9%. The fund offers minimal or no exposure to health care, business services and media firms. Additionally, the fund focuses on giant (52.8%) and large cap firms (28.5%) and has no exposure to small and micro cap securities (see more about EWP’s holdings here).
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Disclosure: No position at time of writing.