Credit Ratings Agencies Could Determine the Fate of the Euro

Monday, French President Nicolas Sarkozy announced plans to rollover Greece's existing debt held by French banks. The plan could set the stage for a broader European effort to salvage the ongoing crisis in Greece.

Yet, the plan rests on credit agencies not cutting Greece's debt to default, according to Bloomberg.

Now, it seems that credit agencies like Moody's (NYSE: MCO), Standard & Poor's, and Fitch hold all the cards.

Should the agencies opt to cut the rating to default, they may be guaranteeing an unraveling of the Euro Zone.

Consequently, there may be some pressure on the agencies to avoid adjusting their ratings.

Still, if the agencies cave to political pressure and avoid making honest judgments in order to maintain political arrangements, they may jeopardize their very purpose.

What use are the agencies if they merely parrot what governments' desire?

Further, if the agencies avoid adjusting their ratings when changes are warranted, it may put the entire global economy at risk. Improperly rated mortgage bonds have been cited as a catalyst behind the 2008 credit crisis.

Could unrealistic sovereign credit ratings lead to a similar crash in the future?

Action Items

Bullish: Traders who believe that the Greek crisis will be solved might want to consider the following trades:

• Buy WisdomTree Dreyfus Euro ETF (NYSE: EU) in a long play on the euro. If the crisis in Greece subsides, the euro may rally.
• Short SPDR Gold Trust (NYSE: GLD) in a short play on the precious metal. If confidence in the global economy increases, traders may abandon the precious metal.

Bearish: Traders who believe that Greece will inevitably default may consider taking positions in the following:

• ProShares UltraShort Euro (NYSE: EUO) is a short euro play. If Greece defaults, the euro may come under tremendous selling pressure and those holding EUO might benefit.
• iShares Silver Trust (NYSE: SLV) is a long play on silver. Though silver prices have always been prone to volatility, should traders abandon fiat currencies for precious metals, SLV might do well.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.