The big story hitting the news wires yesterday (besides Tiger’s mother in law) was Fitch downgrading Greece’s debt.

Fitch cut Greece’s debt rating to BBB+. To make things worse, the two other major rating companies are threatening to follow Fitch’s lead. Yesterday, the airwaves were filled with pundits warning that Greece would default.

If that happens, Greece would be the first EU default since Germany defaulted almost 90 years ago.

But honestly, Greece has a few things working in their favor. First of all, Greece is still a member of the European Union, so EU officials have already stepped in to help. They calmed down the markets yesterday afternoon, stating they will lend their support to help Greece with its budget deficits.

The bigger story, in my opinion, was Moody’s warnings about how the U.S. and U.K. could lose their AAA ratings. The rating agency warned both countries about their growing deficits, something my colleague Chuck has warned you readers about for years now.

While I am happy these ratings companies have finally “’seen the light’” on these free spending administrations, I still say these credit agencies lost their credibility during the credit crisis.

As always, these rating agencies are a bit late to the game, and are stating the obvious. Let’s take a closer look at the two countries they’re threatening to downgrade…

Our Deficit Twin Across the Pond

Like the Fed, the Bank of England (BOE) has been pumping liquidity into the U.K. economy for over two years now. BOE policymakers will likely maintain their “quantitative easing” plan well into 2010 in order to try and spur the U.K. economy.

Chancellor Darling said yesterday that he would rather risk inflationary pressures of keeping support going too long than cutting off the nascent recovery. In other words, he’s not budging on interest rates until he sees a real recovery.

That may not come anytime soon. Manufacturing just stalled out in October after gaining 1.5% in September. Economists had predicted a .4% increase, but were obviously disappointed.

At the same time, the U.K. released its pre-budget report for the current year. The Labour Party is predicting a budget deficit of 178.0 billion pounds or 12.6% of GDP this year.

Also, unemployment remains so high that the Labour department is stepping in to help employ the younger generation that is desperate for work. None of this will help its overall credit rating.

The Seeds of the Next Crisis Are Already Planted…

Meanwhile in the U.S., the Fed continues to promote a recovery. But they may be creating a bigger mess for us to clean up later.

A reader sent me another good quote yesterday: Morgan Stanley’s chief Asian economist Andy Xie said Federal Reserve Chairman Ben Bernanke is prescribing ‘poison’ to the U.S. economy by keeping rates near zero.

In an email released yesterday, Xie said that Bernanke is fueling a wave of speculative capital that may cause the next global crisis.

Bernanke is making decisions based on ‘marginal considerations’ that will help short-term growth and employment instead of focusing on the ’soundness of the system’.

I share Xie’s opinion, and worry that our current administration seems to want to get things back to what they were a few years ago. The problem with this is ‘easy money’ is exactly what put us in this situation, and the re-inflating of these asset bubbles will only set us up for another pop!

Don’t Let This Dollar Rally Fool You

Now that’s a long-term opinion. In the short-term, the dollar continues to rally. (You can see my colleague’s thoughts below for more on why…)

We have a number of investors sitting on the sidelines waiting to see if this dollar rally will have legs. I think it’s smart to watch for cheaper prices, but don’t let this temporary dollar rally talk you out of investing into the currencies.

Don’t Wait for the Dollar to Drop Again to Buy Currencies

I believe the best method is one of cost averaging, which entails placing a set dollar amount into the market on a regular basis. This way, you are purchasing more when the dollar is strong, and less when the dollar is weak.

Timing is important, but being diversified into the foreign currencies and metals should continue to be your goal. Don’t get caught standing on the sidelines while the currency markets turn around.

That’s it for today… The wind is unbelievable this morning, and even though we are just seven stories up, our new building is rocking and rolling. At first I thought we might be having an earthquake, but then realized it was just the wind gusts pushing us around.

Hope everyone has a Wonderful (and not too Windy) Wednesday!!

Chris Gaffney, CFA

www.worldcurrencywatch.com/2009/12/09/what%E2%80%99s-worse-than-a-sovereign-debt-default/