How to Profit from Moody's Downgrade of Greek Debt

Ratings agency Moody's Investors Service has downgraded Greek sovereign debt yet again.

Moody's downgrade of Greek debt to "Ca" from the previous rating of "Caa1" makes Greece the lowest rated country in the world covered by the ratings agency.

Although the agreement reached by European leaders last week to prevent Greece from defaulting on its debts was seen as a positive development by many, it was the details of the deal that concerned Moody's Investors Service.

Moody's said, "The announced EU programme along with the Institute of International Finance's (IIF's) statement (representing major financial institutions) implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%. The magnitude of investor losses will be determined by the difference between the face value of the debt exchanged and the market value of the debt received. The IIF has indicated that investor losses are likely to be in excess of 20%."

The downgrade of European debt is sure to upset European leaders who have said that the regular downgrades from Moody's Investors Service, Standard & Poor's and Fitch Ratings are biased, unwarranted and are making matters worse.

European leaders have complained that the American ratings agencies whose previous failures played a role in the sub-prime mortgage debt crisis are again doing harm to the financial markets by being overly critical of eurozone countries that are experiencing fiscal difficulties.

German Finance Minister Wolfgang Schaeuble said that a similar downgrade of Portugal's credit rating earlier in the month was unjustified and that steps should be taken to curb the influence that the American rating agencies have on the credit markets.

The Europeans have gone so far as to suggest that a European ratings agency should be created in order to give a European perspective but such an agency would probably be seen as heavily biased itself by the financial markets.

European criticism of Moody's latest downgrade of Greek may turn out to be more muted than past reactions to downgrades.

After issuing the downgrade Moody's went on to say that the same measures being taken by the European Union that Moody's is calling a default will in the long run be good for Greece and the European Union.

Moody's stated that "looking further ahead, the EU programme and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden. The support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt."

There are a number of investment options for investors depending on how they look at Moody's downgrade of Greek debt.

For those who see the downgrade as a temporary setback that will actually be good for Greece further down the road, the CurrencyShares Euro Trust (NYSE: FXE) may be worth a look. Many saw a Greek default as inevitable but Europe's leaders seem to have come up with a plan that will spare the market from a shocking default like the Argentine default from a decade ago. If European leaders are finally coming up with a plan that will prevent surprise defaults from countries like Greece, then the future of the euro currency should no longer be in doubt.

Investors who feel that a default by any other name is still a default could opt for the ProShares UltraShort Euro (NYSE: EUO). Greece isn't out of the woods yet and the country still faces the same problems as before. Although financing in the short term will no longer be a concern, the country has yet to solve its long term financial problems and there's even the possibility that an angry Greek electorate may force the government into slowing reform or even reversing austerity measures that were mandatory for the country to keep receiving emergency funding.