How to Profit From China's Decision to Limit FOREX Swaps with Top European Banks

It was reported on Tuesday morning that the state-run Bank of China has halted FOREX swaps with several top European banks. The banks included Societe Generale and Credit Agricole, which were downgraded by Moody's Investors Service last week, and BNP Paribas, which Moody's said it will need more time to review. The banks had been placed under review on June 15 over concerns about how much exposure they had to Greek debt. Since Moody's Investors Service began its review of France's biggest banks, the situation in Greece and much of the Eurozone has deteriorated. The bank was also said to have halted FOREX swaps with UBS AG, due to concerns about the bank's financial stability after it announced $2.3 billion loss from a rogue trader's activities. The move by the Bank of China will do nothing to ease fears that Greece might soon default on its debt and that other troubled Eurozone countries like Ireland, Portugal and Italy could follow. Many in the Eurozone had hoped that China would come to the rescue and start buying up the bonds of troubled Eurozone members like Italy and Greece, driving down these countries' borrowing costs and keeping them afloat while their austerity measures improved their financial positions. It was even rumored that China would soon substantially increase its buying of Italian bonds. While China publicly stated that it stood behind the Eurozone and offered its support, there wasn't any evidence that China was taking action to back up its talk of support. The move by the Bank of China to halt trading with several top European banks isn't the first sign that China was weary of putting its assets at risk in Europe. Speaking at the World Economic Forum last week, Chinese Premier Wen Jiabao went so far as to say that European countries needed to "put their own houses in order" instead of hoping that cash rich China would bail them out. German Finance Minister Wolfgang Schaeuble recently warned that Greece would not receive its next installment of bailout funds if it did not prove that it was committed to all the reforms that it agreed to in order to receive those bailout funds. The threat from the German Finance Minister came after talks between Greece and the so called troika of the International Monetary Fund (IMF), European Central Bank (ECB), and the European Commission (EC) broke down because Greece attempted to shift the focus of the talks to promoting economic growth and away from verifying that Greece was committed to the agreed upon austerity measures. Wen Jiabao's recent criticism of Eurozone countries and the Bank of China's decision to halt FOREX trading with risky European banks seem to be signs that China has no desire to risk losing money to defaulting European governments. With the likelihood of a Greek default looming, investors may want follow China's lead. If Greece falls, so to could the Eurozone. Investors looking to profit from an end to the Eurozone could do so with the ProShares UltraShort Euro EUO or the Market Vectors Double Short Euro DRR, which both climb higher when the euro is under pressure. However, if the Bank of China's decision to reduce its exposure to European financial institutions proves to be short sighted, the iShares MSCI Europe Financials EUFN ETF should see its share price climb higher. If Greece and the other troubled Eurozone countries follow through with their austerity measures and avoid any defaults, European financial stocks could soar higher. The iShares MSCI Europe Financials provides exposure to a broad range of European financial stocks that would benefit from an improving outlook for the Eurozone.