Greece is not the Word, But Portugal is Today

Currency in Crisis

Greece who has been the center of the financial storm in Europe got a cautious vote of confidence from the EC today. It 2 and 10 year bond yields are slightly lower on the day. The lightening rod has been passed to Portugal today and this appears to be one of the factors weighing on the euro and in general helping lift the US dollar. Portugal 10-year yields are up 21 bp today the largest rise in nearly a year and the premium over Germany is the widest in almost that long too. Its 2 year yield is up 23 bp today. The 5-year CDS appears to be at record levels.

A Nobel-winning economist was quoted on the news wires suggesting that stronger EC support for Greece would end the crisis. But this does not seem to be the case. First, as several European finance ministers have suggested "bailing out" Greece would unveil a huge moral hazard and investors would balk. Second, as Portugal's debt market performance illustrates, if Greece is supported, investors may "strike" until Portugal is treated in a similar fashion. And then who is next--Spain ?

The euro was turned back from the $1.4025 area which corresponds with a retracement objective of the slide since Jan 25 high just below $1.4200. The subsequent price action today makes the euro's firmer tone this week look corrective in nature. Still ahead of the ECB meeting (which is not expected to result in a change in policy or guidance), a loss of the recent lows near $1.3855 does not look likely. On the other hand, the prospects of a favorable US jobs report on Friday, could provide some impetus to keep the greenback bid.