Financial crisis in Greece and Spain set to push the euros exchange rate lower

The ongoing financial crisis that is hounding Greece and Spain sees no sign of letting up and is set to push the euros foreign exchange rate lower against the US dollar and other major currencies which could turn the crisis into a full blown disaster.

City analysts now believe that Europe will be hit by a swathe of downgrades in the months ahead, unless real progress is made in fixing the crisis soon.

Greece Updates

Greece, where the sovereign debt crisis began remains a powder keg of the current crisis surrounding the euro zone. If Athens were to default or exit the euro zone, the knock-on effects could push Spain and even Italy over the edge.

With inspectors from the EU, European Central Bank and International Monetary Fund returning to Greece to decide whether to keep it hooked up to a 130 billion-euro lifeline or let it go bust, three EU officials said they were likely to conclude Athens cannot repay what it owes, making a further debt restructuring necessary.

Spain Updates

Spain paid the second highest yield on short-term debt since the birth of the euro at an auction yesterday. The Spanish Treasury sold the 3 billion euros of three- and six-month bills it was aiming to, though yields climbed; the six-month paper jumped to 3.691 percent from 3.237 percent last month.

“The most important takeaway from this auction is that Spain was able to get all its debt out the door,” said Nicholas Spiro of Spiro Sovereign Strategies. “Still, in March, Spain was able to issue six-month debt at a yield of under 1 percent. Now it is paying 3.7 percent.”

Germany on Tuesday threw its considerable weight behind the reform and austerity programme of the Spanish government, in the face of a continuing surge in the cost of borrowing for Madrid, and strong protests against its spending cuts.

A joint statement by Wolfgang Schäuble, German finance minister, and Luis de Guindos, Spanish economy minister, condemned the high interest rates demanded for the sale of Spanish bonds as failing to reflect “the fundamentals of the Spanish economy, its growth potential and the sustainability of its public debt”.

But after talks in Berlin last night on the eurozone crisis, the two gave no hint of any new initiatives to try to calm the markets, or prevent contagion from Spain affecting any other members of the eurozone, such as Italy.

Crisis Spreads East

The European Bank for Reconstruction and Development reported yesterday that Central Europe, the Balkans and the Baltic states are suffering from contagion because of trade and banking links to the debt- ridden euro area.

Commodity producers including Russia, the world’s largest energy exporter, are also at risk as the turmoil threatens global demand for raw materials.

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Financial crisis in Greece and Spain set to push the euros exchange rate lower