Euro Tumbles As Greek Deal Thrown Into Doubt

On Friday morning the EUR/USD currency pair tumbled, dropping below the $1.32 price level. The leader of Greece's far-right party, Karatzaferis, stated that he was unable to vote for the deal struck just a day ago. Further, Karatzaferis and his party offered to resign from the Greek government. While the party is not in control of Greece, they are members of the ruling coalition government, and the ability to implement the Troika deal (designed to get Greece's finances under control) would be thrown into immense question. Perhaps more troubling was a report from Reuters that stated that Greece's police union had begun to turn to the side of the protestors. According to the report, Greece's police would issue arrest warrants for members of the Troika who had "violated democracy." Yesterday, when the Greek deal was finalized, there was little reaction in the market. It appeared that traders and investors were approaching the situation of Greece quite skeptically. Friday's events appeared to justify that cautiousness. The Greek saga has been ongoing for over a year now. It has appeared to affect the markets at some times more brutally than others. For example, from the mid-summer into the fall, the market traded sharply lower on European concerns. In reality, the true situation that may alarm investors lies in Spain and Italy. In the summer, the yields these countries had to pay for their debts began to skyrocket, moving into dangerously unsustainable territory. While the total debt of Greece is tiny on a global scale (the entire GDP of the country is negligible) the size of the Italian and Spanish economies is massive and their debt markets are enormous. Italy has the third greatest amount of debt (next to only the Japan and US). Since late November, the yields on European debts have moderated quite nicely, particularly in Italy, where yields on the Italian 10-year dropped from about 7% to a current value just over 5.5%. So, while a Greek default on its own may have little affect (especially with European financials now having about a year to prepare) the resulting spillover effect or financial contagion could be deadly. Thus, investors may wish brush off headlines on Greece and look to a more relevant indicator: yields on Spanish and Italian debt. Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.