Euro Dollar Currency Speculation History - Next Greece Ireland Spain and Portugal CDS Spreads Crisis

The year of 2010 began with renewed euro selling and a Euro yearly low on Greece speculation. By May 2011 we were all most back to 1.50 against the US dollar. What happened since the Greece downgrades? Greece has not improved, Greece debt was downgraded again on May 5 and 9, 2011. The Euro sits at 1.44 after falling after the ECB put a hold on raising rates.

More economic reports have revealed Greece’s economy was worst than thought. Throughout 2010 and 2011 the likelihood that Greece could default on its massive sovereign debt continued to unnerve Euro investors and speculators. The teetering Greek economy and the flow on affects fractured Euro support and ignited stop-loss selling to forced the euro dollar to a one-year low. Eventually this led to a EU-IMF bailout. From there we have seen the US worsen and print massive amounts of dollars. The Euro effectively has become the lesser of two evils in the FIAT currency intrusion.

Back in 2010 Euro selling was ignited by the European Union’s Eurostat economics statistics group saying that Greece's budget deficit was worse than feared. The market has been rattled with Greece’s problem after it was exposed they had been hiding the true debt volumes from the EU. The Euro fell from a high of over 1.6000 against the US dollar to $1.1901, its lowest level since April 30 2009. From the Euro rallied to nearly 1.5000 again before Euro selling was ignited again as threats of Greece restructuring emerged.

The Euro has withstood Ireland debt woes and bailout, Spain and Portugal CDS blowouts sharply gainst the German Bund CDS as the European finanial crisis shook the markets again. Portugal is also now in need of a bailout.

What was shocking with the earlier Eurostat release was that the budget deficit at 13.6 percent of GDP was up from the Greek estimate of 12.70 and calls into question any of the Greek estimates. The revision also saw Moody's Investors Service cut its rating of Greek government debt even further. The Greek estimates were called into question no less than four times by the end of 2010. This is what worries sovereign investors, what do you believe?

The overhanging concern for Europe, and by definition the world economy is the risks of contagion are rising. Initially the risk is with the PIIGS (Portugal, Ireland, Italy, Greece and Spain). From there other nations are at risk if the fear of contagion is not contained.

The problem with debt when you can’t pay it or absorb is it becomes magnified. Just think of yourself when you can’t pay your credit card. Your credit rating worsens and inversely your interest payments gap up as your interest rate climbs. You may start at 8.00 % then rise to 12% to 18% and then to 25%. Each rise makes it more difficult to pay off. This is Greece’s problem.

Greek government bond prices were slammed after the budget data with the 10-year Greek yield hitting a new high of 8.5 percent. The Greek Bond versus German 10-year government bond yield spread jumped up to 562 basis points from around 516 bps at Wednesday's settlement. The previous record spread was 532 bps. Greek bond 3 years spreads are at 870 and 5 year CDS at 565.

Moody's downgraded Greece's sovereign debt rating down to A3 (many argue that is too high) on the worsening situation in Greece. It doesn’t stop there as Moody’s placed the rating on review for a further possible downgrade, thus Greece’s payments on an already unsustainable debt are growing and growing quickly. This scenario is what led to the EU-IMF emergency fund which Ireland sought a bailout from in late November 2010 after it suffered the same fate as Greece.

The bet amongst market players was will Greece default or get a bailout from its euro zone partners. Reuters ran a poll with about fifty economists. The result was they gave a median 80 percent chance that Greece will turn to the Euro Zone and activate its aid package in the next two months. This is of course what happened. We will wait and see if the stringent austerity measures take hold and turn the ship around.

What this means is they assigned a 25% chance that Greece would default on its debt within the next five years. This is a high probability and CDS (credit default swaps) on Greek depth have blew out alarmingly in just 48 hours. CDS are basically the swapping of insurance on the underlying debt.

What is unsettling is the unknown as made clear from Eurostat in their announcement.

"Following completion of the investigations that Eurostat is undertaking ... in cooperation with the Greek statistical authorities, this could lead to a revision for the year 2009 of the order of 0.3 to 0.5 percentage points of GDP for the deficit and 5 to 7 percentage points of GDP for the debt," Eurostat said.

The flip side of the Euro’s demise, it has been sold off across the board is it lifting the dollar currencies, with the Australian and New Zealand Dollars soaring to multi year highs against the Euro. The US dollar also benefited initially and as measured by the dollar index which is a basket of six major currencies climbed to it’s highest level since March 25 to 88.991.

One has to caution that the US dollar was benefiting from a Euro yearly low on Greece speculation and not from improved conditions in the US.This was borne out later in the year as the USD saw all time or 27 year lows against the Japanese Yen, Swiss Franc, Gold and the Australian dollar. Indeed should Greece default an IMF bailout may be activated putting the US on the hook, and no doubt the Bernanke printing press back on to pay for it? So how much is the US dollar really worth? After Quantitative Easing (QE2) the world is left wondering with Euro speculation and dollar speculation.