Euro, THE END?

Europe’s fiscal crisis worsened yesterday as news broke of Standards and Poor’s downgrade of Spain’s sovereign credit rating to AA. This action has fuelled fears of contagion spreading through the Eurozone economies with a Politician from Germanys Green party letting slip that Greece’s revised bailout package could be worth EUR140bn over 3 years. Analysts are warning of a financial crisis to the extent of the panic caused by the collapse of Lehman Brothers in 2008. Comments from German chancellor Angela Merkel stating it was a “mistake” for Greece to be allowed into the single currency helping to fuel the discord. Reports yesterday stated banks and pension funds sold euros at the fastest pace since the second half of 2008, when the currency plummeted 25 per cent over 3 months. With S&P taking the umbrella away as soon as it starts to rain, investors and politicians will surely be curious as to who will follow Greece, Portugal and Spain with a downgrade.

The yield on Portuguese 10-years bonds is the highest since 1997 while the spread on Spanish debt is the most in a year. The premium on Greek bonds, which were downgraded to a junk rating, fell yesterday to 9.97 per cent after talk of a more generous bailout eased pressure. The euro has suffered an 11 percent decline in the past 6 months making it the worst performer among its 16 most-traded peers. It hit a near 12 month low against the dollar dropping below 1.32.

Sterling fell against the dollar after former Bank of England policy maker Timothy Besley stated the UK economy remained in a “fragile state” and inflation is likely to stay under control this year. These comments have calmed fears that rising inflation would force the BoE’s hand into raising interest rates, action that would severely damage the recovery of the UK. Today, rumours have been circulating the City stating the UK’s prized AAA credit rating, which has been under close scrutiny, was saved from downgrade to AA. Allegedly, only the fact that the UK has less foreign debt prevented action from S&P. The final debate before the election takes place tonight with the main topic being the economy.

Stateside, the FOMC left interest rates at historic lows of 0.25 per cent. Sentiment remained positive as the recycled upbeat speech from Bernanke stating rates would remain low because of low inflation and elevated unemployment was read out.

ECB President Jean Claude Trichet will be speaking at 12:30, most likely sitting on the fence and contributing little to the current climate. Jobless figures for the US hit the market at 13:30 with a forecast of 440k.

Report by Tim Lewis