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What's next for the euro following Spain's downgrade?

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In 1999, 16 of the 27 countries in the European Union set out to unite and strengthen their economies by adopting the euro, a single currency. In 2002, physical coins and banknotes entered circulation.

Now, only seven years afterward, Standard & Poor's downgraded the economy of Spain from AAA to AA+ stating that the global economic crisis had heightened the "structural weakness" of Spain's economy. A key factor in lowering the credit rating was Spain's growing deficit, which is predicted to range from 5.8% to 6.6% of GDP. In addition, Spain's economy is expected to contract by 2% this year.

The downgrade has caused the spread between Spanish government bonds and German bonds to rise to record levels. The cost of insuring Spanish bonds through CDSs (credit default swaps) has also risen to record levels.

In addition to Spain, the economy of Greece was downgraded from A to A-. Portugal and Ireland are also at risk of being downgraded.

This brings into question just how long the euro can withstand further government downgrades without collapsing, and with Europe reverting back to single country currencies.

Is the euro falling apart at the seams?

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Last updated: November 26, 2009: 08:15 PM

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