Three Ways to Play the Debt Crisis in Europe

05/21/2010 12:01 am EST


As the sovereign debt crisis continues to take its toll on Europe and fails to linger away, currencies continue to deteriorate, government bond yields continue to rise, and stock markets remain volatile. Despite the fear that this crisis has brought on, there are four ways to play it.


Many believe that the next country to be hit by the crisis is Japan. Traditionally, the Japanese yen and Japanese bonds have been a safe haven in times of uncertainty; however, this is no longer the case. According to a study conducted by Moody’s, Japanese government debt is estimated to be more than 200% of the nation’s gross domestic product (GDP), which puts limitations on the government’s ability to spend and implement additional fiscal stimulus plans to stimulate a badly battered economy. 

In regards to interest rates, the Bank of Japan needs to keep interest rates at or close to zero and continue its asset purchase program to curb the effects of deflation and worsen the overall health of its economy. To make things even more challenging in the Asian nation, Japan’s demographics are highly unfavorable. The Japanese population is aging and shrinking, which eventually will result in the labor force retiring and cashing in on government bonds, which is likely to result in the Japanese government borrowing more at higher yields from more prosperous countries.

With the future looking relatively gloomy for Japan, some possible plays include ProShares UltraShort MSCI Japan (EWV), which aims to seek twice the inverse daily performance of the MSCI Japan index. A second play includes the ProShares UltraShort Yen (YCS), which allows us to bet against the Japanese yen.

Emerging Markets

Nations that are fast growing and rich in natural resources are likely to be at the forefront of this crisis. One such nation is Brazil. Brazil is one of the few countries in the world that is self-sufficient in oil as well as is a leader in alternative energy. Regardless of the volatility in crude, it will continue to remain a sought-after commodity as global economies grow and nations rich in black gold will reap the benefits. 

The Latin American nation is also the world’s second-largest producer of iron ore and is a leading exporter of steel, coffee, soybeans, sugar, and beef; all natural resources that are likely to increase in demand as economies around the world grow. To further bolster its appeal, total government debt for Brazil is expected to amount to nearly 60% of its GDP in 2010, its budget gap as a proportion of GDP is expected to end the year at about 2.5%, and overall GDP is expected to grow in the 6% to 7% range for this year. This control over government debt—in comparative terms—in conjunction with the nation’s tight control over its monetary instruments, make it a good place to look at amid this crisis.

Some ways to play Brazil include the iShares MSCI Brazil Index (EWZ) and the WisdomTree Dreyfus Brazilian Real (BZF).  EWZ holds 70 different stocks and closed at $63.08 on Tuesday. BZF is a pure play on the Brazilian real, which will likely appreciate as Brazil’s economy grows.

Precious Metals

As Europe’s mounting debt problems continue to leave currencies weak and volatile, gold continues to reap the benefits. Yesterday, the euro tumbled to a four-year low against the US dollar, enabling spot gold to remain north of $1,200 per ounce. As uncertainty continues to loom over the developed world and its economies, gold will likely witness price supports. Gold can be played through the SPDR Gold Shares (GLD) and the Market Vectors Gold Miners ETF (GDX). 

Another notable mention in the metals markets is silver. Not only does silver has many of the same “safe-haven” characteristics as gold, but it is also used in industrials. Silver is often used in electronics and batteries, and therefore, will likely feel price pressures as these industries grow around the world. A notable play on silver is the iShares COMEX Silver Trust (SLV).

As with all other investments, it is important to keep in mind the upside potential, but equally important, to be mindful of the inherent risks involved. To help mitigate these risks, an exit strategy that identifies specific price points at which an upward trend in the mentioned equities could come to an end is of importance.

By Kevin Grewal of

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