The Euro Won't Be The Same Now. By Nicholas Hastings

This is the end of the euro as we know it.

By the end of this week, Germany will more than likely have agreed to back Greek sovereign debt.

If so, then Germany's own sovereign rating will be compromised--ensuring that the euro no longer reflects the fiscal rectitude it once stood for.

Germany, of course, is going down fighting.

Chancellor Angela Merkel was keen to deny over the weekend any suggestion of defeat, insisting that Greece will be taking the appropriate austerity measures and that nothing has been agreed.

For the moment, hopes for the bailout are lifting the euro. A small rally in the price of Greek default swaps and high speculative positioning against the euro have made conditions ripe for short-covering.

See the euro's recent performance:

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But, this could well prove to be the single currency's last hurrah before a more sobering reality sets in.

First of all, there is the question of the austerity measures Athens is prepared to take and whether these, along with hopes for a bailout, ensure investor support for a Greek bond issue later this week. The pricing of the issue will not only provide a key indicator of market faith in Greece but will also give some idea of how much aid Greece will need to remain solvent.

The problem is that any near-term rescue plan for Greece that involves any direct backing by Germany will immediately leave the debt of other major euro-zone debtors looking that much less attractive.

In other words, investors could well be keen to replace higher risk paper from Portugal and Spain with Greek paper guaranteed by Germany.

"The risk is that the crisis simply finds a new focal point," warned Simon Derrick, a senior currency strategist with Bank of New York Mellon in London.

Such a rescue plan doesn't bode well for Germany itself either. German sovereign debt itself would no longer just depend on Germany's own fiscal discipline but would have to factor in the finances of those nations that Germany guarantees.

This watering down of German fiscal discipline means the euro would no longer prove as attractive as it once did, even if German efforts have helped to prevent the wider disaster of Greek default.

In the meantime, Spain and Portugal continue to provide a threat of their own. Despite claims by both governments of fiscal reality, neither are showing any signs of adopting the restraints that might be needed to prevent a funding crisis.

"Markets will not tolerate this unclear message for too long," noted Hans Redeker, head of global market strategy with BNP Paribas in London.

Factor in the slow economic growth that will likely emerge as austerity packages are eventually put in place, along with the risks of political and social unrest that are likely as a result, and the first ten years of the euro's life could well prove to have been a time of strength and tranquility compared with what is to come.

Early in Europe Tuesday, the euro was a little lower after Reserve Bank of Australia Governor Glenn Stevens expressed concern about the sovereign risk. This tended to overshadow the bank's actual bullish move of hiking rates another 25 basis points--its fourth since the end of the credit crunch.

By 0745 GMT, the euro was down at $1.3525 from $1.3559 late Monday in New York, according to EBS. It was also down at Y120.74 from Y120.79.

The dollar was also up at Y89.26 from Y89.07, while the pound came under renewed selling pressure--falling to $1.4890 from $1.4983--as investors continued to worry about the consequences of a hung parliament in the U.K.