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.

The Australian Dollar’s push to parity with the US Dollar is now at risk as policy makers signal they may slow the pace of interest-rate increases and China moves closer to revaluing the Yuan. After rallying 28% on the forex market in the past 12 months analysts are now predicting the currency may fall as much as 16% by the end of the year as higher borrowing costs curb economic growth.

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.