Euro Falls As Greek Deal Seems Unlikely

On Monday, the euro sold off against the US dollar as equity markets pulled back. Even with positive US jobs data on Friday, issues in Greece may have dominated traders' minds. Last year, Eurozone officials were adamant in their rhetoric that Greece would not default; that creditors would see a return of their capital. After the summer's events, and the resulting turbulence, officials changed their rhetoric to allow a partial default. Late in October, a plan was proposed that would see Greek creditors taking a 50 percent haircut on Greek debts. Under this scenario, the move would be considered a "voluntary" default. This voluntary status was important, as, under a voluntary default, credit default swap contracts would not be triggered. CDS contracts, as derivatives, are not regulated, so the extent of the potential damage is unknown. Famously, Warren Buffett characterized derivatives as being weapons of mass destruction. That may prove true in the event of a Greek default. Greece's total debt is a relatively paltry figure when compared to other sovereign balance sheets and the balance sheets of

. Bank of America

, for example, has assets that total over $2 trillion. Greece's total outstanding debt is just a few hundred billion. Yet, the alarm remains because a default that leads to CDS contracts being triggered could create a cascading effect causing the implosion of the global financial system. Arguably, a similar scenario caused the 2008 global financial crisis, when the failure of Lehman Brothers lead to major financial pressures across the globe.

to prepare for a default. Working behind the scenes, financial institutions may have been able to get their houses in order. Thus, a Greek default may be unlikely to cause any significant losses. In the event of a disorderly Greek default, the euro could trade lower, as pressure in the euro currency sees investors fleeing the currency for more attractive paper. If Greek talks seem unlikely to produce a positive outcome, investors could expect to see a weaker currency going into the March 20 deadline. The euro remains a speculative play for many market bears. In the event that a deal is found that allows Greece to remain in the euro and financials to remain fairly untouched, the currency could quickly snap back.