It’s official. The euro currency is no longer immune to the euro zone peripheral debt crisis.
The euro plunged again on Monday – after performing terribly last week – after S&P downgraded Greece’s debt to ‘B’.
S&P cited the increasing likelihood of euro zone officials imposing a selective default of Greek debt on the private sector and Greece’s inability to meet budget deficit targets as reasons for the downgrade.
In response, the euro fell 0.4 percent against the US dollar and 0.5 percent against the Swiss franc.
Nomura Securities International declared that the “honeymoon” is “over for the euro.”
In the past few weeks, the euro was in a “mini-bubble” fueled by “a combination of strong commodity prices and pronounced dollar weakness.”
It also benefited from overly optimistic interest rate expectations.
Last week, when Europen Central Bank (ECB) president Jean-Claude Trichet disappointed euro hawks, and the euro “mini-bubble” crashed.
Last Friday, it fell more on a report that Greece wanted to exit from the euro currency. Although that report was proven to be unfounded over the weekend, it demonstrated that after last Thursday, the euro zone debt crisis mattered once again for the euro currency.
Monday’s drop on S&P’s downgrade of Greece further confirmed that.
What should investors watch for now?
They should pay attention to the ongoing saga of Greek debt restructuring and watch for nascent signs that it would happen to Ireland or Portugal. Widening bond yields or credit default swaps on peripheral euro zone countries are also warnings signs.
Perhaps most importantly, they need to watch Spain; a bailout of an economy this large may be catastrophic.
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