Moody’s may take away Spain’s Aaa rating this week, according to a media reports. The Anglo Irish bank was downgraded due to concerns about risk.

The cost of insurance against the debt of the less stable nations has begun to rise again. The euro moved back toward $1.33, and, if problems with debt in the region get worse, it will almost certainly trade in the direction of $1.25

Pessimists about eurozone sovereign debt and obligations of banks in the region never went away. The doomsayers were merely shouted down. They have begun to emerge from their corner, and they may have their revenge within the next few weeks.

The most obvious targets for traders who want to take short positions in European paper are Ireland and Greece. That has not changed since the start of the debt crisis, nor has the fact that Spain, Portugal, and Italy are next on their lists. Weak banks that carry high levels of troubled sovereign debt or bundles of bad real estate loans are ready targets. Some investors did not believe that the stress tests of Europe’s banks were particularly rigorous. That number of skeptics is likely to grow if other financial firms in Europe suffer downgrades.

Short sellers made the case that the recovery in Europe was too good to be true . European officials wanted to ban shorts, but they served a purpose because their perspective was at least partially true.

Europe’s financial state is in limbo, which the governments, the European Central Bank, and IMF will not admit. They cannot admit it because they have too much capital and credibility as stake.

The faith that the capital markets have in much of Europe is about to be eroded again, and it should be. The notion that the trouble there was waning was always flawed. The instability of its financial markets, the risk of austerity, and high unemployment will take years to resolve.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.