Italy Credit Warning Adds Pressure on Euro

The flood of bad news around the Euro-zone debt crisis continues: S&P revised Italy’s outlook to negative. Italy is the Euro-zone’s third largest country. Will Trichet delay the next rate hike? Updates on 5 troubled countries:

1. Italy: S&P waited until the markets closed to revise the outlook to negative. The rating was left unchanged now. With growing debt, no efforts to tackle it and very weak growth of 0.1% in Q1, the Euro-zone’s third largest country is in trouble as well. This is serious.
2. Spain: The Euro-zone’s fourth largest country saw protests in over 300 towns and cities. Protesters want “real democracy” and feel that political parties aren’t representing them. The demonstrations and camp-ins, also against the banks, are now illegal – demonstrations are forbidden in the day before the elections. In the meantime, the police doesn’t dissolve the protests. Is this the beginning of a “European Spring”? A lot of hidden debt is weighing on Spain.
3. Ireland: The IMF says that Ireland may not return to bond markets so soon. Anger is growing in Ireland. Many want the country to bail out of the bailout. Lower interest rates won’t be sufficient.
4. Greece: France, that was opposed to debt restructuring / reprofiling / rescheduling, is now aligned with Germany. They also acknowledged, like Merkel, there’s no other option. In addition, the IMF suspended its checkup on Greece, Fitch downgraded the credit rating once again, and Norway said it won’t offer any more help. The situation is dire and leaders are still taking their time.
5. Portugal: Here, everything is going “as planned” – the IMF approved its share of the bailout package. Will it succeed? Looking at Ireland and Greece, the chances are low.

EUR/USD closed the week around the pivotal 1.4160 line, after trading higher throughout most of the week. The influx of bad news from Greece heavily weighed on the pair on Friday.

The news about Italy, and more news on the weekend (especially from Spain) are likely to weigh on the pair at the beginning of the new week.

With such a big country in trouble, Trichet is likely to wait with the next rate hike. It’s important to note that Trichet retires in October, and his successor is likely to be an Italian – Mario Draghi.

Stay tuned for the weekly EUR/USD forecast.