How to Profit From Plans To Recapitalize Eurozone Banks

Banking stocks across Europe have been rising since European Commission President Jose Manuel Barroso said that the eurozone's leaders were considering recapitalizing the region's banks. Banking stocks had already been given a boost after German Chancellor Angela Merkel said that Europe needed to come up with a bank recapitalization plan quickly. Despite the market optimism, exactly how to recapitalize Europe's banks is still in question. Some leaders feel that it should be done on a nation by nation basis, while others feel it should be a Europe wide effort. The distinction is important because if a country like France moved to recapitalize its banks, the banks would be in a better position but the country could be at risk of a rating downgrade because of the added risk that it took on by backing its banking sector. European banking stocks like Deutsche Bank DB, Banco Santander STD and Credit Suisse Group CS will be sure to benefit from any plan to recapitalize eurozone banks. European banking stocks are already rising on talk of a banking recapitalization but they're so far down for the year that they still have significant upside potential. Previously, most of the rescue talk was about emergency lending to troubled eurozone members like Greece, Ireland and Portugal. However, as a Greek default looks increasingly likely, eurozone leaders are considering how the fallout from a Greek default could affect the region's banking sector. With the focus shifting to shoring up European banks against their exposure to Greek debt, the prospects of the European financial sector are looking better. The iShares MSCI Europe Financials EUFN ETF gives investors exposure to the European financial sector and could climb higher quickly once a banking recapitalization plan is announced. While the banking recapitalization news has pushed stocks higher, there has been a lot more bad news coming out of the eurozone over the past year than good news and there's no reason to believe this trend will change any time soon. This week has already seen news that Greece is unlikely to meet its budget targets, that Greece was virtually shut down by another day of protests against unpopular austerity measures and that Moody's Investors Service on downgraded its rating of Italian debt. Moody's Investors Service also said that all but the top rated eurozone countries faced the possibility of downgrades in the near future. With all this negative news coming from the eurozone, many investors might question how much good a bank recapitalization will do. Also, if funds are diverted to bank recapitalizations, that leaves less money on the table to keep eurozone borrowing costs down through purchases of the bonds of troubled eurozone countries like Italy and Spain. It also leaves less money available for any future bailouts like the ones already received by Greece, Ireland and Portugal. Investors looking to take advantage of the situation could short the euro with the ProShares UltraShort Euro EUO or the Market Vectors Double Short Euro DRR ETFs and move more of their funds into safe haven currencies like the Swiss franc and the Japanese yen with the CurrencyShares Swiss Franc Trust FXF or the CurrencyShares Japanese Yen Trust FXY ETFs.