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France's Debt Woes Saddle ETFs

France's recent disclosure of debt problems means more troubles for ETFs with eurozone exposure.
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NEW YORK (TheStreet) -- France has become the next and most prominent nation in the euro zone to admit that it has a debt problem and that means continued trouble for ETFs with eurozone exposure.

The country's budget minister Francois Baroin said on Sunday it would be difficult to keep the country's top-notch credit rating without some stern budget cuts.

That task became more difficult over the weekend, when the cost of protecting French debt reportedly rose to near record levels that they were in the first week of May.

French banks also started off the week poorly, as large banks saw losses stemming from their significant exposure to Spain and southern Europe.

Spain received more bad news on Friday when Fitch downgraded the country's credit rating. That came after weeks of speculation that the banking sector would weigh on the government's budget. Fitch's downgrade came after Spain was downgraded in late April by S&P.

The recent stabilization in equity and currency markets shows that most of these issues have been priced into the equity and currency markets.

France's admission that its top credit rating is not guaranteed also suggests a new awareness among European countries leaders of the problem they face.

In the long term, it's healthy for the eurozone countries to acknowledge the risks and avoid having the currency union torn apart.

Over the next few years though, austerity measures will likely result in an economic slowdown for the countries in Europe as less stimulus and higher taxes bite into consumption and manufacturing.

Countries not included in the monetary union that are large trading partners with the euro countries due to proximity, such as Great Britain, Switzerland and Eastern Europe, are also likely to face slower economic growth. China may also be at risk, since Europe is it represents the country's largest export market.

The bottom line is that funds such as

iShares MSCI Italy

(EWI) - Get Report

,

iShares MSCI Spain

(EWP) - Get Report

, and

iShares MSCI France

(EWQ) - Get Report

, will continue to underperform U.S. equities going forward, as will foreign and global ETFs with hefty European exposure, such as

TST Recommends

iShares MSCI EAFE

(EFA) - Get Report

.

Also, considering that the risks in Europe are not yet over, the risk-to-reward ratio in European equities is unfavorably skewed. Currency risk will likely negative for foreign investors and the potential gains for investing in Europe are limited since GDP growth will be weaker due to austerity measures.

For international diversification in a portfolio, better stability and more growth potential can be found elsewhere in

iShares MSCI Canada

(EWC) - Get Report

or

iShares MSCI Singapore

(EWS) - Get Report

.

For a further list of what I consider to be the most intriguing international plays going forward, investors can read

this article

that recently appeared in the Street.com.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management was not long any of the funds mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.