(Euro story updated for events in Europe on Tuesday and Wednesday)
NEW YORK (
) -- Covering the Greek debt crisis and the slide in the euro in 2010 has been like monitoring a schizophrenic's state of mind from minute to minute. When the Spanish prime minister said on Tuesday that rumors of Spain's demise were "complete madness" he picked the right term to describe the situation in Europe.
One day, a bailout package is a "sure thing" and fears that Europe is sinking deeper into its debt mess ease. Then the next day, political resistance makes a bailout package for Greece look "unlikely" and sends the markets tumbling. The European debt Chicken Little has had its head cut off and reattached so many times during 2010 that even if it were free range it wouldn't be a very happy poultry ambassador of the economic apocalypse.
The equity markets lost $1 trillion in value on a single day last week, Wednesday, and that massive selloff was repeated on Tuesday, with a $1.1 trillion loss in the equity markets, on fears that the European debt crisis would derail a recovery in Europe and edge the global markets into a major correction.
The MSCI World Index saw all of its 2010 gains wiped out on Tuesday, and the situation on the streets of Greece was turning very ugly, with at least three people reportedly killed in the protests against the austerity measures that the Greek government is attempting to implement as part of controlling its massive debt.
Noted market prognosticator Nouriel Roubini -- who predicted the U.S. recession a year ahead of its actual occurrence -- stoked fears of a global contagion stemming from the European debt crisis when he said last week at the Milken Institute Global Conference, "Greece is just the tip of the iceberg, or the canary in the coal mine, for a much broader range of fiscal problems."
By Tuesday, the fears about Greece's woes had morphed into the most widespread fears that it was no longer just about Greece, but a debt contagion spreading across Europe, with Spain and Portugal next on deck to wreak havoc with the markets by way of their debt.
Day to day, it's hard to keep track of all the noise related to Europe's woes. Greek labor unions balk at a bailout; German politicians dilly-dally on their big role in approving a bailout based on domestic political pressures; and some market economists argue in favor of allowing Greece to default rather than seeing through an expensive bailout package.
When people start dying on the streets of Athens, though, the daily turns of trading euphoria followed by trading agony stemming from the outlook for a European bailout package seem minor by comparison to the human toll. Television screens were filled with images of rioting in the streets of Athens and around Greece on Wednesday morning.
The crests of optimism followed by fears of the economic apocalypse started on Monday, notably after a weekend bailout package announced by the European Union for Greece, and the fear was continuing on Wednesday morning, with the market selling off early.
On Monday, a Greek bailout package was "in place." Yet on Tuesday, fears that the Greek bailout package might fall apart -- due to Greece's inability to receive support for its austerity measures and the trick of receiving approval country by country in Europe for the lending. By the end of the day Tuesday, the euro had slipped below the $1.30 threshold to its lowest mark versus the dollar in a year. The European Union and the International Monetary Fund had agreed to a $145 billion bailout package over the weekend, but investors remained skeptical.
Greek workers began their two-day strike on Tuesday, which led to the first reports of the fatalities on Wednesday morning, related to a fire set by rioters in a Greek bank building. The looming debt crises in Spain and Portugal have not helped, either. It's still an open question this week whether -- after months of back and forth over the road forward for Greece -- the European Union will be able to pull together and bring Greece back from what has been an unplanned-for odyssey in 2010. If a deal is completed this week -- and many in the markets are still hopeful of that outcome -- Greek would have until May 19 to make its next debt payment.
The IMF was headed for a Sunday vote on its portion of the Greek bailout package, while Spain's Prime Minister made his "complete madness " comment on Tuesday in response to rumors that Spain would be the next indebted European nation asking for support.
Short-term fortunes may have been made in fast money trading on stocks like the
National Bank of Greece
, but a larger and more critical question lingers: will the euro collapse in 2010?
Roubini, for example, told
that Greece "could eventually be forced to get out" of the European Union, which would put more pressure on the euro.
Standard & Poor's cut Greece's credit rating below investment grade last Tuesday, and lowered Portugal's credit rating also. Last Wednesday, S&P downgraded Spain's debt. The Greek debt crisis has been described as the economic "ebola virus," spreading far and wide and triggering the euro's slide.
On Wednesday morning, Moody's Investor Service said that it had put Portugal on watch for a potential debt downgrade -- a process that could take up to three months to lead to an actual downgrade of one or two notches. "Although Moody's believes that Greece faces far more serious fiscal difficulties than Portugal, the rating agency nevertheless sees an extended period of retrenchment for Portugal as inevitable until the country's domestic financial imbalances are corrected," the rating agency wrote.
There are specific fears that the exposure held by European banks to Greek debt, as well as debt of other stressed European nations, will cause another credit-triggered global markets crisis.
Overall, French banks have the greatest exposure to Greek debt among European lenders, according to the Bank for International Settlements (BIS) -- $78.8 billion of the $193.1 billion of total claims European banks have on Greece.
are among individual European banks most exposed to Greece's financial crisis.
France's banking sector has the second-largest exposure to Portugal and Spain debt loads, after Germany, according to the BIS.
European banks have more at-risk assets in Portugal and Spain than in Greece. European lenders are holding Portugal debt issues of $240.5 billion -- including $47.4 billion by German banks and $44.9 billion by French firms, according to BIS figures from the end of 2009 quoted in a Bloomberg report.
Overall, European exposure to Spanish debt stands at $832.3 billion.
Greek Prime Minister George Papandreou began trying to persuade labor unions last week to accept further austerity measures as the European Union worked to finish a bailout package to avoid a Greek bond default.
The Greek Prime Minister met last Thursday with the heads of the largest unions as Greek, European Union and International Monetary Fund officials discussed a bailout package that would allow Greece to tap emergency loans, and as of last Thursday, the markets had rallied on the optimistic outlook for Greece.
The Greek budget deficit had soared to 13.6% of GDP in 2009, four times above the maximum threshold allowed by EU rules.
The euro has lost more than 7% against the dollar this year. Institutional investors sold euros this month at the fastest pace since the second half of 2008, when the euro fell more than 25% versus the dollar, according to Bank of New York Mellon Corp. data.
Yet, lo and behold, last Thursday the euro gained off a one-year low reached last Wednesday -- and has since surpassed in terms of an annual low -- rallying back above the $1.32 mark after having fallen below that level. The $1.30 mark for the euro is considered an important psychological threshold, and the market psychology was showing this week that it had a low threshold for European debt-triggered selling.
All the up-and-down action in the markets related to the euro and the Greek debt crisis may be far from over, too, even though the EU is talking in terms of the "finishing touches" on a bailout package. Those finishing touches have been in place, before being stuck in place, throughout 2010.
Barclays Capital wrote in a report last Thursday, "We believe the move toward a Greek rescue package will remain a slow grind and a weight on the euro," and the securities firm specifically cited the political situation in Germany as a reason to expect more ups and downs in the outlook on a resolution to the Greek debt crisis.
Given all of this, in regards to the lingering European debt situation -- and the threat of a global economic contagion --
do you think the euro will collapse in 2010?
Take our poll below to learn the consensus of TheStreet -- and don't hesitate to leave a comment.
-- Reported by Eric Rosenbaum in New York.
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