By Win Thin

The euro is making a new high, thanks in part to news that Italy's lower house passed a two-year austerity plan that aims to cut the nation's budget gap by 25 billion euros.

In addition, Italy approved the European Financial Stability Facility, which means that 440 billion-euro fund is now authorized to sell debt backed by sovereign loan guarantees. That money would then be used to help member countries that are in trouble.

The euro Thursday has broken the post-EFSF high from May 10 around 1.3090. So far, no follow-through buying has materialized, but momentum is clearly on the euro's side right now, so further dollar losses are likely in the near term.

They're not a slam dunk, however, because the euro uptrend has been painfully slow since mid-July. We note again that 3-month EURIBOR has continued to creep higher every day this week, so all is not entirely right with the eurozone banking system.

Italian 10-year bonds are outperforming today, with spreads to German bonds flat even as Greek bonds have widened 3 basis points, Irish bonds have widened 8 basis points, Portuguese bonds have widened 5 basis points and Spanish bonds have widened 4 basis points.

Standard & Poor's said that its A-plus rating on Italy is supported by the fiscal package. This is one of the few times where we agree with a ratings agency. Our sovereign rating model views Italy as A-plus,A1 and A+, for Standard & Poor's, Moody's and Fitch, respectively.

The actual ratings from the three agencies are A-plus/Aa2/AA-, respectively, so Moody's and Fitch appear too optimistic.

Italy so far has been able to avoid the downgrade frenzy that has hurt Greece, Ireland, Portugal and Spain. However, S&P warned that, "If consolidation efforts are delayed or hampered by fiscal slippage, the long- and short-term sovereign ratings could come under downward pressure." Despite all the favorable news out of Europe lately, we do think that downgrade risk remains in play for many of the countries.

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