Profiting from Growing Talk of Creating a Eurobond

Germany is downplaying speculation that a Tuesday meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy will result in some sort of agreement to create eurobonds backed by all of the eurozone members. Steffen Seibert, a spokesman for the German government, said a day before the scheduled talks between the heads of the eurozone's two biggest economies that the creation of a jointly issued eurobond was not up for discussion during the meeting. President Sarkozy may be more interested in reforms than before because there have been rumors that France may soon lose its triple-A credit rating and that its banking sector is in trouble. The French stock market took a beating last week as the rumors spread and led to France and a number of other eurozone countries introducing restrictions on short selling. There have been increasing calls for eurobonds from troubled eurozone members like Italy and Greece, who have seen their borrowing costs rise to unsustainable levels. Italian Finance Minister Giulio Tremonti said over the weekend that Europe would not have found itself in the midst of another financial crisis if a eurobond had already existed. The idea of bonds backed by all eurozone members is appealing to the countries with the biggest fiscal deficits because they would benefit from the higher credit ratings of countries like Germany. However, the bonds would also result in increased borrowing costs for the more fiscally responsible countries because they would be obligated to back the debts of countries like Greece, Ireland, Portugal and Italy. In theory, the euro bonds would lead to more stability in the market and lower borrowing costs for the governments that are finding it increasingly difficult to fund their operations. The major problem with this theory is the assumption that countries like Greece and Italy that ran up huge deficits and violated European Union laws or even covered up their financial woes will conveniently change their ways. There's no indication that this will happen and the idea of a eurozone bond that is being promoted by the most financially irresponsible eurozone members may be just another way for them to shift the burden of their past mistakes over to the more fiscally responsible countries like Germany. When German Finance Minister Wolfgang Schaeuble was asked about the idea of eurobonds, he wasn't open to the idea, saying that so long as each country controls its own financial policies that differing interest rates were needed as an incentive for sound fiscal policy or punishment for reckless behavior. Investors who see the discussion of eurobonds as a sign that the eurozone countries will continue to work together to get through their current financial crisis might be interested in the ProShares Ultra Euro ULE or the Market Vectors Double Long Euro URR. There is a growing belief in many countries that the euro cannot survive as a currency but if eurobonds are introduced it will be another step in the direction of a stronger financial union between the eurozone countries and talk of getting rid of the euro should die out. The eurozone's banking sector could also get a boost if there is more of a shared burden between member states, which could lead to increasing share prices for banking stocks like National Bank of Greece NBG, Banco Santander STD and Bank of Ireland IRE, and the iShares MSCI Europe Financials EUFN ETF could benefit as well. Other investors may see the push for eurobonds as further evidence that Europe's most troubled economies are still looking to others to solve their self inflicted financial woes. These investors may want to consider the ProShares UltraShort Euro EUO or the ProShares UltraShort MSCI Europe EPV ETFs.