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.

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.

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.

Barclays Capital, which in December forecast a peak of $1 in 2010, now expects the Australian Dollar to be the biggest loser from what it calls a “significant” Yuan revaluation. The Aussie dropped 1.0% against the US Dollar on Friday to close at AUD$ 0.92403. In early trading today it continued to decline against the US Dollar touching a low of AUD$ 0.91516.

Traders and strategists say Reserve Bank of Australia Governor Glenn Stevens may have increased borrowing costs too much too soon after raising the nation’s overnight cash rate to 4.25% this month, up from 3% in October. Home-loan approvals fell in February for a fifth month and retail sales and building approvals declined more than forecast.

The Royal Bank of Australia’s most aggressive tightening cycle since 2000 comes amid growing speculation that China will allow its currency to appreciate to help cool an economy that expanded at the fastest pace in almost three years last quarter. That means China, Australia’s largest trading partner, may buy fewer commodities and cut the demand that helped Australia avoid the global recession and expand its economy by 2.7% in 2009.

“A Yuan revaluation could prove to be a reason for a market rather long Aussie to trim its positions,” Sean Callow, a senior currency strategist at Sydney’s Westpac Banking Corp. said about the bullish sentiment. “As part of an effort to cool inflation and tighten monetary conditions, a revaluation would certainly be a negative for the Aussie.”

High interest rates are one of two main reasons why international investors have put money into the Aussie. The other is China, where 4 trillion-Yuan ($586 billion) of stimulus spending on housing, highways and power grids sparked record imports of iron ore from Australia, the largest shipper. China’s government said on April 15th that its economy expanded at an 11.9% in the first quarter.

Growth is so strong that Chinese officials are now taking steps to keep the economy from overheating. The cabinet raised minimum mortgage rates and down payment ratios for some home purchases, saying “more forceful” steps are needed to cool speculation after house prices rose at a record pace in March. Analysts and economists now expect that the next step will be allowing the Yuan to strengthen. A revaluation could drive up prices of commodities as Dollar based imports to China would become more affordable.

Historically the Aussie has reacted negatively to any tightening of policy by China. In July 2005 it surged 1.3% when China increased the Yuan’s value by 2.1%, only to slump 4.3% over the next five months. The drop was the second largest after the Yen among the most-traded currencies.

A civil suit filed Friday alleges that Goldman Sachs didn’t stick to its long-standing claim that “clients’ interests always come first,” and instead failed to inform investors that the securities they were selling had been designed to fail by another client, hedge fund Paulson & Co., which in turn profited from the Goldman’s client losses. According to the lawsuit, Goldman mislead investors by telling neglecting to them “vital” pieces of information –namely that the so called triple A financial instruments were really made up of subprime mortgages, and that the hedge fund run by John Paulson was primarily involved in choosing which securities would be part of the portfolio.

Goldman Sachs stock value plunged 13% on Friday, the biggest one day drop in the company’s history, wiping out $12.4-billion of its market value as the Securities and Exchange Commission (SEC) sued the bank and one of its vice presidents for allegedly misstating and omitting key facts about a collateralized debt obligation.

According to the SEC, Goldman worked with the hedge fund Paulson & Co to create some of the complicated securities that magnified the damage of the subprime mortgage meltdown. That, in itself, was common. However, what sets this deal apart, according to the SEC, was that Goldman and the hedge fund designed the securities to maximize the chances they would tank. Goldman then profited by selling the questionable investment to customers, and the hedge fund reaped $1 billion by betting that the securities would plummet.

While all signs point to the fact that Goldman-Sachs did break the securities law, the SEC’s investigation into Goldman Sachs could not come at worst possible time. The charges against Goldman, once the most respected but envied firm on Wall Street, come at a time when the idea of a sustainable economic recovery is final taking hold. In the past months, investor confidence has steadily returned as a string of economic news has shown a more willing consumer and a rapid but consistent increase in manufacturing activity. At the same time, corporate profits this quarter are showing improved top line growth, an indication the economy is improving at a rapid pace - a precursor to hiring. Unfortunately, at this point, it doesn’t even matter whether the allegations against Goldman Sachs are lawful; the mere thought that one of America’s largest investment houses could commit such fraudulent activities will cover the market with a thick cloud of deep mistrust and uncertainty. How long that sentiment lasts could depend on whether the accusations against the Wall Street banking titan stick, and if they are symptomatic of a larger contagion within the trading practices of major institutions. Either way, SEC allegations that Goldman misled investors about the subprime mortgages it sold them does not help build confidence that financial markets are operating fairly. Moreover, the charges against Goldman’s arrive just as lawmakers in Washington are negotiating how to reform the U.S banking system. A complete overhaul in the financial system is the next major piece of legislation that President Obama’s agenda. Already the markets have begun to fall just on the mere thought that Washington will begin to crack down on the Wall Street firms.

The decision was announced as data showed that Singapore’s economy had expanded 32.1% in the first quarter, more than expected and the fastest pace since records began in 1975. Compared to the first quarter of 2009, Singapore’s trade-dependent economy grew 13.1%, the strongest pace since 1994. Singapore raised its inflation projection for 2010 from 2.5% to 3.5% and revised its GDP forecast upward for the second time this year.

By allowing its currency to rise in value, the Monetary Authority of Singapore (MAS) hopes to control economic growth and inflation. This is because the stronger exchange rate makes the price of goods, services and investment opportunities outside Singapore cheaper, thereby diverting demand and money away from Singapore towards the rest of the world.

Singapore’s MAS sets policy just twice a year and would have risked being behind the curve if it had not tightened now. It manages the Singapore Dollar in an undisclosed trade-weighted band against a basket of currencies, instead of setting interest rates. It said in its statement that it had now switched to a policy of “modest and gradual appreciation”.

The announcement comes amid speculation that China will revalue its currency, the Yuan, this year. Other currencies in the region also jumped on the news as markets speculated that Singapore’s decision could pave the way for higher interest rates in the other big exporting nations. The Malaysian ringgit appreciated 1.05%, while the Korean won was up 0.85%.

Perry Kojodjojo, an HSBC currency strategist in Hong Kong, said Singapore’s action had increased expectations that central banks would need to raise rates soon, making the carry trade more attractive — that is, borrowing funds in one currency at a low rate to make higher-yielding investments. That would result in more capital inflows and cause currencies to appreciate.

Asian policy makers are withdrawing stimulus measures taken to counter the global recession as their economies lead the world out of the slump. China, the region’s biggest exporter, announced today that GDP grew 11.9% in the first quarter compared to the same period last year adding pressure on Premier Wen Jiabao to loosen the Yuan’s peg to the US Dollar and raise interest rates.

But for now with China choosing to go slow on any move to allow the Yuan to appreciate, economists say that other Asian countries are under pressure to keep their own currencies cheap in order to maintain competitiveness.

Until recently this economic union accomplished all that the individual countries hoped it would. Within the Euro Zone, the single currency facilitated economic transactions across borders, helped to optimize investments as well as brought price transparency, greatly facilitating business within 16-nation bloc; while globally the Euro brought the Euro Zone its long sought economic power. For Germany in particular the creation of the Euro and single economic and political zone proved to be beneficial.

However, now with the Greece financial crisis pulling on on the value of Euro (in the forex market), and with Germany looking to foot a significant chunk of the EU’s-IMF combined €45billion bailout plan, many Germans are beginning to question whether Germany made the right choice in joining the EU. If faced with the choice again, would Germany join the EU?

The EU’s latest rescue plan for the debt-stricken nation of Greece consists of a €45billion bailout, €30billion of which would be received from the Euro Zone countries. If activated, the €30 billion emergency lending plan for Greece would divide shares among euro-zone countries, excluding Greece of course, according to their share of capital contributions to the European Central Bank. These contributions are based on population and GDP. As the largest country with the EU, both demographically and economically, Germany would be forced to pay 27.92% of this amount – equal to €8.4billion and equivalent to more than €100 for every person in Germany.

Already in Germany, many economists are threatening to go before the constitutional court and contest the bailout plan, on the basis that the aid package breaches the EU’ Maastricht Treaty. And the Germans have every right to be upset.

Over the next five years, Athens has to raise €240 billion, roughly the country’s GDP. Of that €150 billion is to pay down the principal owed on maturity bonds – the rest is interest. That is why the EU’s impressive “€30 billion” worth of aid is mere tiny droplet is Greece’s sea of debt and cash requirements. And with Greece rapidly losing its credit ratings, the Greek government is unlikely to be able to raise this much cash from private investors, no matter what interest rate they offer them. So even if Greece takes the EU’s generous bailout, within a few months Greece will be right back in the situation it is new – A triple B-minus debt rated country with an unacceptably high and rising debt ration. Greece will be unable to finance itself then as it was a few days ago! If Greece wants any chance at this not happening, it will have to restructure its entire debt configuration. So if Greece will be right back on same sinking boat in the matter of a few months, the question on most German’s minds is why do we need to fork over €8.4billion in order to keep this already sinking country afloat?

However if push comes to shove can Germany really risk not giving financial aid to its floundering neighbor? Whether Greece takes the EU’s €45 billion bailout package now, or whether it can hold out a wait a few more months before accepting doesn’t really matter. The tiny Mediterranean country has dug itself into such a financial disaster that it will eventually need to take aid from its fellow EU members. And when that time comes, unfortunately for the Germans, Germany will need to fork over its share of the package.

If hypothetically Greece were too default, then Europe would be left with a situation similar that of the United States when Lehman Brothers collapsed. In the fall of 2009, America stood and watched as one of its largest banks collapsed. No one could have ever imaged that the bankruptcy of Lehman Brothers would have had such an enormous impact on the America’s, and even the world’s economy – but it did. It was the largest bankruptcy ever in the U.S, but the real news is what came after. First came financial panic and uncertainty that threatened to shatter the global capitalist order followed by an unprecedented expensive effort by governments on both sides of the Atlantic to patch things up. If this is what happened when a bank collapsed, image what would occur if country collapses, which could very well be the case if Greece is shut out of the sovereign debt markets? What will the consequences be for the entire EU’s banking system and economy? Already the Euro has depreciated nearly 15% against the U.S dollar, and if the “Greek situation” isn’t fixed, the single European currency will most like keep sliding down. While there be no written provisions pertaining to a bailout of any one member of the Euro Zone, letting Greece just default may have disastrous consequences for the other 15 nations. According to estimates for the Bank of International Settlements, Greece its neighboring countries a total of $303 billion, including $75.5 billion to French banks, $64 billion to Swiss banks, $43.2 billion to German banks.

Since its creation, the European Union has rapidly become one of the world’s global powers; with the Euro the most traded currency – second only to the U.S Dollar. Over the course of the past ten years, Germany has immensely benefited from all the EU’s political and economic strength – however, now it must pay a heavy price: a €8.4 billion bill to foot, along with the possibility that Greece will still default, and that other EU countries (namely Portugal, Spain and Ireland) could quickly be heading in the same direction as Greece. So the question remains, if Germany had to do it all over again, would it have adopted the Euro and tied itself to the same economic fate as its 15 other EU counterparts?

On the forex market the US Dollar extended losses against the Yen after the report to trade at 92.71 Yen to the US Dollar from 93.24 Yen late yesterday. The US Dollar weakened to $1.3613 per Euro from $1.3592 late yesterday.

Another report by the Labor Department showed that the price of goods imported into the US rose less than anticipated in March, indicating few signs of increasing inflation pressures from abroad. The 0.7% increase in the import-price index followed a revised 0.2% drop in February. Excluding petroleum, prices fell 0.2% last month, the first decline since July 2009.

After eliminating the influence of prices, which are the numbers used to calculate GDP, the trade deficit grew to $42.5 billion from $40.9 billion in January. The average for the first two months of the year is about the same as in the previous quarter, indicating trade will have little influence on growth figures.

Purchases of foreign-made goods increased to $182.9 billion as demand for consumer goods, including televisions, toys, pharmaceuticals and clothing climbed to the highest level since October 2008. With the economy generating 162,000 jobs in March, the most in three years, U.S. consumers are beginning to spend more. That spending will probably continue to drive import growth.

Exports increased 0.2% to $143.2 billion, led by growing foreign demand for engines and semiconductors. An $821 billion drop in civilian-aircraft deliveries to buyers overseas, an often volatile category, limited the overall gain.

Sales of U.S.-made goods are getting a boost from growing demand in China and other expanding economies. The U.S. surplus with newly industrialized countries, including Korea, Singapore and Taiwan, reached a record $2.2 billion as exports grew.

President Barack Obama has said the US needs to focus on expanding exports and investment rather than depend on consumer spending as in the past. He plans to increase government-backed export financing for small businesses by 50%, to $6 billion a year.

Today’s report showed the trade gap with China decreased to $16.5 billion, the lowest since March 2009, from $18.3 billion in the prior month. Americans imported the fewest Chinese-made goods in almost a year. China reported on April 11th that it posted a trade deficit of $7.24 billion in March, the first in six years. It still showed a $9.9 billion surplus with the US.

China’s trade numbers were released three days after U.S. Treasury Secretary Timothy F. Geithner met in Beijing with Chinese Vice Premier Wang Qishan amid rising pressure from American lawmakers for action to allow its currency, the Yuan, to appreciate and reduce a trade gap that was $227 billion last year.

Following the release of the news, the Euro surged 1.2% to strike a high of $1.36906, the highest price for the single currency since March 18th. This unexpected jump comes just a few days after the single European currency dropped to within one cent of an 11-month low against the greenback (last Thursday).

In a statement made by Greece’s Prime Minister George Papandreou “With today’s decision, Europe sends a very clear message that no one, any longer, can play with our common currency, no one can play with our common fate,” Unfortunately, while this latest Greek aid package announcement may have temporarily restored market confidence in the Euro, and may make investors more willing to continue to buy Greek bonds- uncertainties continue to loom over longer term prospects for reducing Greece’s mountain of debt, which have drastically crippled confidence in the Euro.

Speculations about details regarding the Greek aid plan are making the market more comfortable that something concrete is finally being discussed and hopefully agreed upon - as a result restoring confidence in the single European currency. While the Euro may have made a substantially leap in value on the back of this news, traders will need to see more action, and less talking if the Euro is to continue this recent bullish trend. The single currency is still down more than 4% against the greenback and yen since January, making it one of the biggest underperformers in major currencies in 2010.

Similarly, the existence of the safety net for Greece may help reduce growing concerns about “domino effect” on other countries with debt problems – namely Portugal and Spain. Unfortunately in the long term, markets are likely to remain worried about Greece’s ability handle its tremendous €300bn debt, which exceeds its annual economic output by more than a quarter – especially given the country’s deep recession.

According to Greek official, the government would decide within a few days whether to ask for the aid, depending on whether market interest rates subside. Having the program on the table may be enough to shore up confidence, but without the amount of cash needed, it’s just a matter of time before Greece will actually have to take the aid package and use it.

The Frankfurt-based ECB kept its benchmark interest rate at 1%. President Jean-Claude Trichet has already announced changes to ECB collateral rules to help Greece as it struggles to finance its debts.

The ECB’s 22-member Governing Council is gradually withdrawing the measures it took to tackle Europe’s worst recession since World War II, including measures to provide banks with unlimited cash. At the same time, concern that Greece’s crisis could spread to other countries in the 16-nation Euro Zone is undermining confidence in the currency. The single currency continued to fall against the US Dollar for the fourth day today, European stocks also dropped and Greek bonds slumped.

Last month EU leaders rallied round a proposal to help Greece with a combination of International Monetary Fund assistance and bilateral loans at market interest rates, while expressing confidence that the debt-laden nation wouldn’t need outside help to fix its problems.

Trichet initially opposed IMF involvement in any rescue. Increasing speculation that the plan is now going to unravel has weakened the Euro in the forex market this week. As the Greek crisis persists, economists have pushed back expectations for ECB rate increases and now don’t expect a move until the first quarter of 2011.

“Greece is keeping the ECB in wait-and-see mode,” said Carsten Brzeski, an economist in Brussels. “The indirect impact from the Greek case is that we will see more fiscal tightening from several Euro-Zone members earlier than the ECB thought, which has a deflationary impact and is slowing down the recovery.”

In other rate announcements, the Bank of England kept its benchmark interest rate unchanged at a record low of 0.5% earlier today and held its bond-purchase plan at 200 billion pounds. In the U.S., the Federal Reserve has maintained its pledge to keep rates at a record low for an “extended period.”

By contrast, the Reserve Bank of Australia this week raised its key rate for a fifth time in six meetings to 4.25%. The Australian Dollar has advanced to an 11 week high against the US Dollar this week closing trading yesterday at USD 0.9771.