PIIGS Alert: Italy Loses Its Wings

The US isn’t the only country in the midst of a debt crisis. (Check Out “CHART OF THE DAY: Watch the US Debt Set a 60 Year Record“) On May 20, Standard & Poor’s (NYSE:MHP) cut Italy’s (NYSE:EWIcredit-rating outlook from “stable” to “negative” after they failed to display significant economic growth and improvement of the national debt.  Italy’s government says they will continue forward with measures to balance the debt by 2014.

In the meantime, they’re being blamed for bringing the Swiss Market Index down to a two-week low.  Even U.S. stocks fell sharply Monday as investors grew increasingly concerned over European sovereign debt.  The Dow Jones Industrial (NYSE:DIA) is down almost 100 points, the S&P 500 is down over 1%, and the Nasdaq Composite is down 1.3%.

As if a country’s worth of bad news isn’t enough, Spain’s (NYSE:EWP) ruling Socialist party didn’t fair well in their regional elections, and Iceland’s volcanic eruption means a lot of canceled flights throughout Europe, both contributing to a state of unease that can lead to decreased spending.  And until Italy’s news, Greece was getting all the attention for its $500 billion public debt burden, for which no solutions have been officially proposed.

The possibility of debt restructuring–or worse, the possibility that these European countries might default on their loans–is worrisome because it can have a domino effect.  Italy’s (NYSE:EWI) inability to pay back its loans puts its debtors in a position of being unable to pay their loans and so on.  It also causes would-be debtors to reconsider upon the likelihood that they may not be repaid, thus scaring global investors in securities, equities, and commodities.

The problems in Europe, combined with the most recent reading of the HSBC (NYSE:HBC) China Manufacturing Purchasing Managers Index, which shows a 10-month low in manufacturing activity, has many worried about their investments and market outlooks.  But there’s a silver lining to every dark cloud.  The U.S. dollar (NYSE:UUP) is faring much better against a host of foreign currencies, crude and wholesale RBOB gasoline prices (NYSE:UGA) are down, and consumer gas prices are falling as well, down to an average of $3.84 for a gallon of unleaded, from $3.96 last week, though still up from $2.80 this year.  And while the country continues to witness freak storms that have caused transportation and refining issues (NYSE:XOP) that pushed gas prices in some states to well above $4 per gallon, those prices now seem to be leveling out to meet the national average.

Don’t Miss: PIMCO’s Mohamed El-Erian: Emerging Economies are the Place to Invest.