If you're watching the markets, it seems the Eurozone's sovereign debt is the only financial news that matters right now (which might be accurate). If the recent S&P downgrade of Greece and Portugal didn't wake up EU officials, then yesterday's downgrade of Spain should provide some fresh incentive. The IMF's Strauss Kahn declared that what is at stake is certainly today the economic situation of Greece, but it is more than that because Greece is part of the Eurozone. It's the confidence in this zone which is at stake and that is why we need to act swiftly and strongly. Even obstacle-creating German Chancellor Merkel seemed motivated to find a solution, calling for resolute action for the sake of the entire Eurozone. Media wires were buzzing with rumors that German lawmakers would offer Greece a 3-yr package for up to EUR 120bn (looking a Greek debt schedule clearly a single year solution is not an option now). Regardless of the comments made by officials, the EMU sovereign risk continues to mount on Greece and peripheral EU states. Spanish debt was equivalent to 53% of its GDP in 2009, which is relatively low compared to other EU nations. But unlike its more debt-riddled neighbors, the Spanish government continues to run a huge budget deficit with little-to-no fiscal tightening. Spain is banking on a strong economic recovery to right itself and shore up its finances. If that strong recovery doesn't come due to Spain's lack of global competitiveness and weak domestic demand, then the country will be forced to employ drastically stringent fiscal policy if it ever hopes to tackle its deficit. Most economists see the happenings in the EU as bad omens for the region. The sever fiscal adjustments which must occur in many of the states might set off a chain reaction plunging the region into depression. Economically healthy nations such as Germany, which rely heavily on exports to EU states, will see reductions in demand for their exports, which could put them on a road to fiscal problems - continuing the cycle as the bug infects and re-infects more member states. The EU did receive some timely good news today as April's EC business and consumer suggests that the euro-zone economic recovery is continuing regardless of the fiscal crisis. While German Unemployment dropped for the fifth month pulling the unemployment rate down to 7.8%. However, is does highlight the divergence between core and periphery countries economic climate. Regardless of what EU officials believe or state about the economic crisis, they would be well advised to not politic themselves over a financial cliff. If the crisis in Greece persists, it will drag down other EU states with it. If the EU goes down, it will put enormous stress on global financial markets, more stress than the bank failures of 2008. We are still heavily bearish on the EUR and looking to sell on any rallies. On the North American side, yesterday's FOMC meeting provided some relief to the persisting bear sentiment with no closure to endless liquidity. As we expected, the FOMC held the Fed Funds Rate at 0.25% and reaffirmed its commitment to keeping rates low for an extended period. Clearly Bernanke and Co. are in no rush to tighten the money supply while unemployment in the US remains painfully high and inflation relatively benign. We have a growing feeling that a 2010 rate is unlikely and are now looking to hold currencies where the central banks have clearly expressed a tightening bias, examples being CAD or NZD.