Cyprus, The Market, and European ETFs

Today the small (and when I say small, I mean small) island of Cyprus rejected an amended bailout plan that would have levied a tax on bank deposits. This puts the country in a situation where it may default and this could lead to even bigger problems.

There is also the option that the Troika could offer a new bailout plan that will raise the lower end of the deposit tax that would be placed on accounts. The latest plan would not have put a tax on deposits under 20,000 Euros.

The market this morning was up before the news of the rejected vote and the S&P 500 immediately dropped several points on the news. The reason investors are spooked is because of the "unknown" outcome that lies ahead. The bank deposit tax or even worse, Cyprus leaving the EU is not the big fear. The big fear is that if Cyprus does it, what is stopping Spain or Italy from following their lead.

I truly believe the likelihood of Spain and Italy or any other major EU country getting itself into the mess that Cyprus is in is very small. Sure, it could happen and that is why stocks move lower on the Cyprus news, but they are two very different animals.

ETFs to Watch:

• iShares Spain ETF ($EWP) & iShares Italy ETF ($EWI) - Both countries are looked at as the next big trouble spots in Europe and when the news in the region turns negative they are typically the two that get hit the hardest. Both are down over 1.1% today.
• SPDR International Treasury Bond ETF ($BWX) - This ETF has large exposure to European bonds and if the situation gets worse it will lead to higher interest rates and thus bond prices fall.
• Global X FTSE Greece 20 ETF ($GREK) - Falling over 3.5% today to a new multi-month low as the Cyprus fears rekindle the issues in Greece.