Tuesday, January 13, 2009
Abandoning the USD in favor of the higher yielding Euro is a dangerous trade. The risks of the Euro unraveling are growing larger by the day.
Recent volatility in the foreign exchange markets should definitely raise eyebrows. In the end, the USD is still the undisputed reserve currency of the world.
Spain and Italy are the most likely candidates for sovereign default.
The Short View: “If the euorzone could find a way to deal with a member country’s national default, that might confirm the euro’s status as the world’s next reserve currency. But if a solution could not be found, and a country excited, any such ambition would be over, says John Authers.”
Spain’s Long-Term Sovereign Ratings May Be Cut by S&P (Update4): “Spain’s top AAA long-term sovereign ratings may be cut by Standard & Poor’s, putting Spain at risk of its first downgrade from the credit rating company as the country suffers its first recession in 15 years.
S&P cited “significant challenges” facing the Spanish economy and said it would probably decide on the rating this month. Credit-default swaps linked to Spanish debt saw the biggest one-day gain in almost three months, a sign that investors attached a higher risk to Spanish assets.
“Everyone knew that Spain was in trouble, but this is one of the triggers that investors were waiting for,” said Ivan Comerma, head of treasury and capital markets at Banc Internacional-Banca Mora in Andorra. “This is the worst timing as Spain is about to start with its funding plan for this year and the country’s lenders are about to start selling government- backed bonds.”
Spain’s economy, which outpaced the euro region for more than a decade, entered a recession in the second half of last year as the global credit crunch deepened the collapse of a debt- fueled domestic housing boom, sending the unemployment rate to the highest in Europe. The government has announced some 90 billion euros ($120 billion) of stimulus measures, on top of steps to support banks, while tax revenue is falling.”
Posted by Ben Bittrolff at 8:06 AM