The Euro dropped for a fifth month versus the dollar in the longest stretch of losses since November 2008 as fears that Greece’s deficit crisis would spread across Europe. The 16-nation euro touched a new one-year-low of $1.3115 on the forex market, following Standard &Poor’s decision to cut Spain’s credit rating- fueling concerns that the debt crisis was in fact spreading at an alarming pace. The S&P’s decision to reduce Spain’s credit rating from AA+ to AA came one day after the rating agency downgraded Greece’s credit rating to junk and lowered Portugal’s to the third-lowest investment grade.

Since the announcement that Greece’s budget deficit was more than 12% of the country’s GDP (3 times the EU’s allowed limit), the Euro has lost more than 7% of its value against the USD (on the forex market). However, the Euro’s tragic fall may soon come to an end as Greece, the source of the currency’s troubles, may have reached a historic deal with the Euro-Zone and the IMF regarding the country’s huge bailout package.

This morning, the Greek Prime minister vowed that his government “won’t allow the country to become bankrupt” while urging his countrymen to bear the harsh sacrifices need to mend broken public finances. Hours before an emergency meeting of euro-zone finance ministers, that is expected to approve the EU’s contribution to an international loan package worth about euro120 billion ($159 billion) over the next three years, the Greek government announced a new round of sweeping spending cuts through 2012. The measures are expected to include further hikes in consumer taxes, and deeper cuts in pensions and public service pay. The EU and especially the IMF also demand a significant overhaul of the civil service”We have no other choices and no time, so accessing the bailout is inevitable,” Prime Minister George Papandreou said in a televised speech at an extraordinary cabinet meeting.

The deal comes as Greece detailed even worse projections for its battered public finances. The bailout package represents the first rescue of a member of the 16-nation currency bloc by its fellow countries, a step that EU treaties explicitly discourage but which EU policymakers say is now necessary to save the euro zone from breaking apart. A meeting of euro zone finance ministers, scheduled for 1400 GMT today in Brussels, is expected to give its go-ahead to the aid, which could reach up to €120 billion ($160 billion) over three years and will come in return for tough austerity measures.

Greece and its international backers hope the deal can finally put an end to a crisis that has shaken (forex) markets worldwide, stoked fears of contagion to other euro zone members such as Portugal and Spain, and threatened the very existence of the single currency.

Last Thursday, Greece saw two words flash before its eyes: “GAME OVER!” as the European Commission data showed the Greece’s fiscal deficit was much higher than previously anticipated. The Euro slumped to an 11 month low against the U.S Dollar on the forex market as Greece’s budget deficit jumped to 13.6% of the GDP for 2009 – almost a full percentage point higher than the Greek’s government projection of 12.7%. The unexpected news sent the yield on Greek government bonds flying as concerns rapidly increased that the cash-strapped nation would be unable to service its debt.

In one last attempt to save its nation from default, the Greek government hit the panic button and called upon the activation of the EU IMF joint bailout plan. Without this aid package, Greece will be unable to make repayments due on its loans by May 19. However, at this point (forex) investors are uncertain if the bailout attempt (that still requires the approval of the other Euro Zone nations, namely Germany) will even work to save debt-stricken the nation. The experience of Argentina also shows that even repeated IMF programs cannot always prevent failure. For Euro policy makers, this very thought raises a fundamental question – what will happen if the EU-IMF €45billion rescue plan is not enough to save the drowning nation? Would a default by Greece lead to the demise of the Euro?

To answer this question, we must first look at the definition of a “default”. Rating agencies define default as missing any contractual payment beyond the grace period. Well this may seem like a serious matter, the fact is that in reality markets have often been quite forgiving in situations in which governments do not pay on time but make a credible promise to repay the full amounts due at later date. If this were the case, it would surely not mean the death of the single European currency.

The real question then, is would a default in which the country refuses to or cannot pay in full lead to the possible demise of the Euro? While many financial institutions, say that if Greece were to default it would effectively spell the end the Euro as a currency – the fact is the situation is not so black and white.

On one hand, such a default would put to rest the very idea that the E.U is an “exclusive” club whose members are all equal and work towards a common goal, specifically the stability on a single common currency – the very notion upon which the E.U was founded. In theory, membership in such a club protects against financial problems because members are supposed to behave well and help each other in case of unjustified speculative attacks. While the EU treaty states that members are not liable for each other’s public debt, there is an understood political commitment, as we are seeing right now, to provide emergency help.

In Greece, following a “messy” default, euro notes and coins would still circulate in the economy, but one euro in a Greek bank account would no longer be automatically equivalent to a euro in a bank account elsewhere in the euro area, as Greek banks might immediately become insolvent and thus be shut out of the payment systems. Until Greek solvency was re-established, the euro zone would thus de facto have lost one of its members, even though the Greek Central Bank head would still sit on the Governing Council of the ECB and the Greek finance minister would still be a member of the Euro Group, with their normal voting powers intact.

While Greece would be hit hard the impact on the rest of the Euro Zone would be relatively unfelt given the fact that Greece represents a mere 2% of the entire area’s GDP. From a certain point of view, a massive default of Greek’s part would leave the Euro Zone in better shape. Its institutions would probably be strengthened because it would have become clear that the framework is strong enough to withstand the failure of one of its members.

However, we have left out one important fact- the underlining fear of a domino effect. The main reason why even Germany has agreed to the bailout package for Greece is that such a default would trigger speculative attacks on government debt and financial institutions in systemic countries like Spain and Italy. The problem is that default dangers in Greece are making creditors think twice about lending to other “perceived” cash-strapped governments. Even if Greece avoids default, this latest crisis means governments everywhere will have to pay more for their finance, which in turn will push up borrowing costs for everyone – right across the Euro Zone and beyond, including in the UK.

While there is no real concrete justification for the EU’s extreme fear that other members will soon come down with the Greek like flu – markets (forex) for the most part can be irrational. The real test of the Euro zone is thus whether it can protect from speculative attacks those members that do follow at least the spirit of its rules. Despite its large debt level, Italy, for example, has for most of the time kept its budget deficit below 3% of GDP.

While a default by Greece would not necessarily mean the end Euro, it would be catalyst that could spark a default of any systemic country which would indeed mean the end of the euro zone, and the tragic demise of the Euro.

Yesterdays surge in Greek bond yields has added pressure on the nation’s government to activate an EU bailout and accept more spending cuts as the country’s civil servants held a one day strike today to protest against government cutbacks.

The euro continued to fall against both the US dollar and sterling for the fourth day today. Yesterday the single currency dropped 0.66% against the pound closing at GBP 0.86861. Today it touched a low of GBP 0.86547 in trading on the Forex market. The euro fell 0.35% against the US dollar yesterday, closing at EUR 1.33870. Today it touched a low of EUR 1.33302 against the dollar.

Greece’s benchmark 10-year bond yield soared to 8.13% yesterday, its highest level since the single currency was introduced in 1998 and more than double the comparable German rate. Rates rose as it became clear that talks about the aid package would not be finished until days before Greece is due to repay a multi-billion euro loan.

Greece’s finance ministry said the talks with the European Commission and the IMF would take about two weeks, with a joint statement to be issued on around May 15th. On May 19th, Greece is due to repay investors an 8.5 billion euro bond.

Today’s strike, the fourth of its kind this year has forced hospitals and schools to close as well as affecting government ministries. Prime Minister George Papandreou is being criticized by voters who believe the austerity measures his government has enacted are excessive and by investors who believe more measures should still be enacted to cut a budget deficit in excess of 12% of GDP, the largest in the euro zone.

The Greek government said it still plans to cut the deficit by four percentage points this year, though it backed away from a forecast that the shortfall would fall to 8.7%. An EU official said the bloc has always aimed for a four percentage point cut in the budget gap this year. While Finance Minister George Papaconstantinou says he’s “not influenced” by the surge in bond yields, investors are skeptical he can maintain momentum to cut the budget shortfall to less than 3% in 2012.

Euro zone partners have agreed to offer a rescue package of up to 30 billion euro with another 10 billion euro to come from the IMF. However speculation persists that even 40 billion euro might not be enough. On Tuesday, Axel Weber, a member of the European Central Bank governing council, denied reports that Greece might need as much as 80 billion euro to avoid default.

The country needs to raise about 11 billion euro by the end of May, and about another 35 billion euro during 2010 to fund public spending such as public service pensions, and to finance structural reforms.