Italy, Spain ETFs Tank On Cyprus Bailout

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March 25, 2013
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Cyprus bailout fuels nervous reaction, as ETFs focused on southern Europe, such as ‘EWI,’ plunge.

The iShares MSCI Italy Index Fund (NYSEArca: EWI) and the iShares MSCI Spain Index Fund (NYSEArca: EWP) had lost almost 5 percent of their value Monday afternoon, extending losses after eurozone counterpart Cyprus closed a bailout deal that involved imposing taxes on certain bank deposits.

Year-to-date, EWI’s losses now surpass 11 percent, while EWP is down just over 5.25 percent. Both funds, serving up direct exposure to respective equities in those two countries, are on the frontlines of the ongoing eurozone debt crisis, as Italy and Spain loom as some of the euro-bloc’s most financially troubled economies.

Today, Cyprus, the third-smallest economy in the 27-member eurozone group and one struggling with solvency, agreed to a $13 billion bailout deal that will involve a tax on bank deposits above 100,000 euros.

When the news first came out last week that Cyprus was looking to implement such tax, equities markets around the globe turned lower, fearing contagion from the new chapter in the eurozone debt crisis. In particular, investors feared that similar measures could be implemented in places like Italy and Spain.

“The Cypriot crisis is one of confidence,” analysts at the geopolitical consultancy Strafor said last week in reaction to the news. “Once a government openly discusses the possibility of taking away part of the bank deposits of a country, trust in the banking sector is shaken.”

What’s at stake is confidence not only in the island’s banking system, but also in the country’s government and in the European Union as a whole, Stratfor said in a note released March 21.

“This crisis of confidence was triggered when the Cypriot government, the European Union and the International Monetary Fund decided the island would not get a traditional bailout (in which the distressed country would receive the full amount of necessary funding),” Stratfor analysts said.

Instead, they vowed to provide Cyprus with only part of the funding, leaving the country to source the rest any way it saw fit.

“The Cypriot crisis is communicating to the rest of Europe that the European Union is failing to protect the interests of its citizens,” Stratfor said. “The Cypriot crisis reopens the question of the legitimacy of the European Union.”

Fallout In ETF Markets

It’s no surprise, then, to see EWI among some of the hardest-hit single-country Europe ETFs, as Italy’s outlook is clouded not only by solvency issues, but also by a presidential election last month that failed to result in a clear governing mandate.

Since then, the country has seen its credit rating downgraded a notch, and consumer confidence indicators slip more than expected this month, as reported by news services today.

“Selling pressure has been present in broad European-based equity ETFs in the past few days,” Paul Weisbruch, an ETF trader with King of Prussia, Pa.-based Street One Financial, told IndexUniverse.

“It seems that there is profit-taking in broad-based ETFs, and more specifically, single-country ETFs that are generally considered ‘higher beta’ than, say, France and Germany,” he added.

Italy and Spain fit that “higher beta” description, landing the funds at multimonth lows Monday.

 

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