Sarah Davie

The euro has not performed as badly in the last nine days as it did in the previous four. Against the US dollar it has lost a net third of a cent, having not moved outside a $1.3025 - $1.3225 channel. The range of sterling/euro has been even narrower - fractionally more than a cent - although the pound is a net two thirds of a cent stronger compared with last Wednesday. As usual, the long Easter weekend put a dampener on activity.

It also limited the number of economic indicators to which investors could look for guidance. The pickings from Euroland were particularly slim: German and euro zone industrial production both fell in February; the Sentix index of investor confidence for Euroland deteriorated from -8.2 to -14.7; German inflation slowed in March from 2.3% to -2.1%.

Britain's economy had somewhat more to say for itself. February's industrial production (including mining and energy) was lower in the UK too, as was the narrower manufacturing production. The NIESR think tank estimated that Britain's economy had expanded in the first quarter of the year but only by the smallest measurable increment; 0.1%. February's trade deficit was a billion pounds wider than expected at -£8.8bn. the only two obviously positive statistics were the RICS house price balance, which improved from -13% to -10%, and the BRC retail sales monitor, which showed sales increasing by 1.3% in the year to March.

The Bank of England and the European Central Bank both kept interest rates unchanged; the ECB for a fifth month, the BoE for a 38th. The Bank of England's statement was the barebones affair which usually accompanies a no-change decision. The ECB's regular press conference was more informative. Among other things, ECB President Mario Draghi made clear there would be no repeat of the two Long Term Refinancing Operations which took place in December and March, providing Euroland's commercial banks with more than a trillion euros in cheap three-year loans.

That revelation did not go down well with investors, coming as it did hard on the heels of an unsatisfactory auction of Spanish government bonds. The Spanish Treasury had wanted to sell €3.5bn of three- to eight-year notes but was only able to get €2.6bn away at a what it considered a sensible price. As far as many Euroland financial institutions were concerned, without the cheap finance provided by the LTROs there was no reason - and maybe even no money - to buy the slightly suspect government bonds of Italy and Spain.

In the days that followed there was a rapid erosion of confidence in Italian and Spanish government debt. Italy found itself paying double the rate of interest on its borrowings compared with a month earlier.

Some of that confidence returned towards the end of this week. Apparently in recognition that the revival of a broad panic about southern European sovereign debt would be A Bad Thing, senior ECB people hinted that more help might be on the way. European Central Bank executive director Benoit Coeure said; "We have an instrument, the Securities Markets Program, which hasn’t been used recently but it still exists." The SMP is the mechanism by which the ECB bought bonds at the end of last year, with the aim of supporting them. M Coeure's comment was the broadest possible hint that the ECB will buy more Spanish (or other) government debt should it feel the need to do so.

And that is probably more a matter of when than if. With Spain, especially, there is considerable doubt among investors and elsewhere about the ability of Prime Minister Rajoy's government to deliver what it has been forced to promise. Spain already spends more than half its money on pensions, unemployment benefits and interest payments. A shrinking economy and rising unemployment will do nothing to improve that situation.

The deterioration in sentiment towards southern Euroland has been positive for the pound but has not taken sterling/euro appreciably higher. Sterling is now banging its head on serious resistance at €1.2150. A long queue has formed of investors and companies keen to sell pounds against the euro at or close to a 21-month high for the currency. More than half a dozen times in the last week the pound has popped its head above the €1.2150 parapet and on every occasion it has been beaten back.

That is not to say it will never be able to make the breakthrough but it could take some time. And even when it does happen there will be another line of sellers just two and a half cents distant at the 41-month high.


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Sarah Davie

Last Friday and over the weekend the euro was heading lower against the US dollar. As London opened this Monday it was looking at a loss of one and a half US cents. At that point it turned around and by the end of the day had recovered almost entirely. Since then USD/EUR has gone nowhere and it is unchanged on the week. The euro has fared less well against the pound, losing a net one cent. Almost the entire loss came on Wednesday morning.

What tilted the balance for sterling were Wednesday's UK employment data and the minutes of the April Monetary Policy Committee meeting, which came out simultaneously. The MPC minutes showed only one of the nine members - David Miles - voting in favour of further asset purchases by the Bank of England. Adam Posen, the longest-standing advocate of further quantitative easing, voted with the majority to leave the total of bond purchases at £325bn. The reasoning behind his change of heart emerged later in the week when he told journalists; "I think the economy is stronger than what that data is [sic] going to show." From the point of view of sterling investors are not enthusiastic about quantitative easing because the more money the Bank prints, the more it dilutes the value of existing pounds. The reduced likelihood of renewed QE therefore made investors better-disposed to sterling.

The employment data helped too. Claimants for jobseekers' allowance rose more slowly than expected in February and March. February's increase was revised down from 7,200 to 4,500 and the increase in March was 3,600, half the expected number. Additionally, the unemployment rate fell to 8.3% in February. They were not stunningly bullish figures but they were better than expected. Taken together with the MPC's shift away from QE they were good enough to flush out the sterling buyers.

Investors paid little attention to the few Euroland statistics that emerged. February's trade surplus was smaller than forecast; inflation was a little higher than expected, unchanged at 2.7% in March; ZEW's survey of economic confidence was higher; construction output was -7.1% lower; consumer confidence fell by eight points to -19.8, only a point and a half above January's three-year low.

But investors were more interested in Spanish government bonds than they were in the statistical minutiae. Specifically, they wanted to see how the Spanish Treasury would manage in its fundraising efforts. In auctions of one-year to ten-year bills and bonds Spain was hoping to borrow between €3bn and €5bn. There were question marks over whether it could raise that much and, if so, how high a rate of interest lenders would demand. In the event, the whole lot sold out and Spain picked up its ten year money at a rate of 5.743%. Although that was more than four percentage points above what Germany would have had to pay it was less than the psychologically-important 6%, which is assumed to be the threshold beyond which the country would be applying for bailout help.

The assumption is that Spanish institutions bought almost the whole 5bn; certainly it was hard to find a bank in northern Europe ready to admit it had taken part. Whilst that gave an incestuous flavour to the exercise investors were relieved that the auctions had not gone as badly as feared. That relief removed the threat of downward pressure on the euro.

How long that relief survives will depend on what happens in the next few days. Today and tomorrow G20 and the International Monetary Fund are meeting in Washington. A major feature of those meetings will be the IMF's effort to drum up more financial support that would augment the pledges from Euroland and Japan. On Sunday the first round of the French presidential election will be a reminder that François Hollande, the likely winner, wants to renegotiate the balanced-budget demands of the EU Fiscal Compact. Next week the euro area releases the preliminary purchasing managers index figures and Britain publishes the first stab at gross domestic product growth in the first quarter of 2012. If it is a negative number we will be back into technical recession (not that anyone could tell the difference).

Sterling is on something of a roll at the moment, even if its gains against the euro are of the salami-slicing variety. A suitably positive GDP figure on Wednesday would help it cement itself into its new higher range and set the stage for a test of the June 2010 high. If the growth turns out to be negative all bets are off. Anyone needing to turn pounds into euros should take note of that risk.

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Sarah Davie

For the euro it was mostly about Spanish government bonds and whether investors would buy them at a sensible price. There were two auctions, the first for 12-and 18-month bills, the second for maturities of between two and ten years. The short-term paper was not expected to be a problem but there were questions about whether Spain could get the 10-year bonds away.

In the event it went, if not swimmingly, then at least better than could have been the case. Crucially, investors were happy to lend 10-year money to Spain at a rate of interest lower than the 6% that would have set alarm bells ringing.

Beyond the disaster-free bond auctions, the euro also received help from surveys of German confidence. ZEW reported improved investor confidence and IFO found greater confidence among businesses. There might be trouble down south but the German economic engine is still firing on most cylinders.

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Beaverstate

Tick tick tick tick..... this will not end well.

Sarah Davie

The euro had a better week against the US Dollar than it did against sterling, adding about half a cent after changing direction almost every day. Sterling/euro was equally choppy but here it was the pound that rose by a net half cent. As London opened this Friday morning sterling was at its highest level since August 2010.

Very little went right for the euro and quite a bit went wrong. Except for some of the German data, nearly every economic statistic from Euroland was a disappointment. The good news came in the form of more positive business sentiment in Germany and a half point improvement in that country's services sector purchasing managers' index to 52.6.

The other Euroland purchasing managers' indices were less inspiring. Every other PMI from Germany, France and Euroland itself was between 47.4 and 46.0, noticeably below the dividing line at 50 that separates growth from contraction. The "official" Eurostat measures showed consumer and business confidence two points lower at -19.9 and -9.0.

Last weekend's G20 and International Monetary Fund meetings in Washington delivered nothing of particular help to the euro. The IMF cheerily announced it had secured $430bn of new funding pledges for its bailout kitty but the bulk of that was pledged by Euroland nations themselves. The United States and Canada refused to contribute even a cent; they believe Euroland is big enough and old enough to sort out its own problems.

The political situation became more worrisome. As expected, François Hollande won the first round of the French presidential election and he is likely to move into the Élysée Palace after next Sunday's run-off. Investors fear he will withdraw his country from the Fiscal Compact and head off in the opposite direction, borrowing and spending more to stimulate the economy. Even the Netherlands is going through an austerity crisis. The government fell after one of the coalition partners refused to support new spending cuts.

Spain remains the euro's biggest stumbling block. The Spanish Treasury has been able to sell its bills and bonds but it looks as though the only buyers are Spanish banks, whose bad debts already comprise one in twelve of their loan assets. There is a real concern that Spain will go the way of Ireland for the same reason; the banks' overexposure to a collapsing property sector.

The latest developments in Spain are a downgrade of its credit rating by Standard & Poor's, a 21st consecutive month of falling retail sales and an unemployment rate of 24.4%, the highest in 18 years, with more than half of all young people out of work.

Against that backdrop it has not been too difficult for sterling to look good. It helped that the UK economy put in a couple of positive figures. Retail sales rose by an impressive 1.8% in March and were up by 3.3% on the year. A higher than expected public sector net borrowing requirement in March was offset by a downward revision to the previous month's figure. Nationwide's index of consumer confidence improved by nine points to 53, its best level since last June.

The pound stumbled on Wednesday after the preliminary estimate of UK gross domestic product for the first quarter of the year showed the country had returned to recession. In Q4 2011 output went down by -0.3%, in Q1 2012 it shrank by -0.2%. Having expected to see 0.1% growth instead of -0.2% shrinkage, investors were initially inclined to sell the pound but quickly changed their minds. It looks as though they are more interested in the current data, which have been positive, than they are in what was going on between one and four months ago. They also suspect that the preliminary estimate of GDP, which only tells about 40% of the story, could be revised higher next month.

With sterling/euro at a 22-month high and the weekend in sight it would be a surprise if investors were not to take profits on some of their long positions, knocking the pound back. But even if they do it is unlikely the flow of bad news from Euroland will dry up quickly or convincingly enough to prevent sterling eventually breaking through the current resistance. If it can achieve that, sterling/euro will be looking at its highest level in three and a half years.

Sarah Davie

The euro touched its lowest level against the pound in three and a half years. That coincided roughly with sterling's trade-weighted index reaching its highest level since August 2009. The two events were consistent with a soggy week for the euro and a further improvement in investors' perception of the pound.

The monthly (provisional) Euroland purchasing managers' index round showed shrinkage in every sector, in every country, apart from German services which managed a score of 52.6. All the others were below the boom/bust dividing line at 50. Eurozone consumer and industrial confidence were both down by two points, at -19.9 and -9.0 respectively. The Marmite on euro's cake was a downgrade of Spain's credit rating.

Unusually, investors disregarded a second quarterly fall in UK economic output, even though it meant a return to technical recession. It seemed they preferred to focus on more recent - and more positive - data.

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Sarah Davie

Against the dollar the euro spent four days extending the positive progress it had begun last Thursday, rising to its highest level in four weeks. From bottom to top the move covered one and a half cents. The euro turned south on Tuesday after an unexpectedly strong showing by the US manufacturing sector purchasing managers' index and opened this Friday morning about a quarter of a cent down on the week.

Sterling/euro covered a similarly narrow range. By Wednesday morning the pound was quarter of a cent down from last Friday's starting level but 24 hours later it was half a cent up. It held onto the gain to start this Friday half a cent higher on the week.

There was little among the data to make investors more enthusiastic about the euro. German retail sales were reasonable, rising by 0.8% in March to cancel out the previous month's -0.9% fall. But the increase was not enough to offset the weakness of all the other euro zone ecostats. Except for the German services sector purchasing managers' index, which scored 52.2 on a scale of 0-100, every other Euroland PMI was below 50, signifying lower activity. Unemployment went up to 10.9% in Euroland. It was helped higher by near-25% unemployment in Spain and by 19k new jobseekers in Germany who lifted the unemployment rate there to 6.8%.

There was a flurry of excitement on Thursday as a result of comments by European Central Bank President Mario Draghi at his monthly press conference. He called for a "growth compact" as an alternative to Chancellor Merkel's fiscal compact. He also advocated the formulation of a strategic plan for the single currency; "Collectively we have to specify a path for the euro - how we see ourselves in 10 years from now." Investors approved of his ideas and briefly sent the euro higher. But it did not take them long to realise that as a mere central banker, Sig Draghi had no power to set his strategy in motion. To do that would require the co-operation of 17 heads of government, including Chancellor Merkel.

The surprise with sterling was not that the UK economic statistics were so strong but that investors were so relaxed about the weak ones, as they had been with last week's negative gross domestic product figure. That is not to suggest the UK ecostats were bad: The three PMIs for manufacturing, construction and services were all in the growth zone above 50 and monthly mortgage approvals were no fewer than they have been during the last two years. The construction sector PMI was a positive surprise, a point down on the month at 55.8 but two points better than forecast.

The strength of the construction PMI led to further doubts about the accuracy of the preliminary GDP figure. A major contributor to its -0.2% decline was a -3% fall in construction output. That does not sit comfortably with the PMI readings, which have been positive for the last two years. The mismatch leads investors to suspect the GDP figure will be revised higher.

It is that sort of optimism that has led investors towards their more positive view of the pound. They are much more inclined to identify with its good points and to turn a blind eye to the bad than they were even a month ago. The upbeat sentiment helped the Bank of England's trade-weighted index to its best level since August 2009 and its highest point against the euro since June 2010.

It has not been easy going for the pound though. Almost every half cent of upward progress has brought new sellers out of the woodwork, eager to sell sterling at the highest level in this or that length of time. Further upward progress, although likely, is by no means assured at this stage.

Sarah Davie

It was another fraught week for the euro in the run-up to elections in Greece and France. Investors were under no illusions with either: Greece would vote anti-austerity and the resulting shambolic coalition would threaten its survival as a member of the single currency. France would vote anti-Sarkozy and President Hollande would have as little success as his predecessor in squaring the circle of budgetary balance.

And so it turned out. Investors mimicked the obligatory reaction of shock although, in reality, they cannot have been taken aback. The euro fell on Monday morning but it did not fall far - half a cent here and there - and London traders saw no reason to take things any further when they returned to work after the long weekend.

Amid the confusion, sterling was able to sneak above its summer 2010 high against the euro to its highest level since November 2008. The breakthrough does not guarantee further upward progress but does make it likely.

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Sarah Davie

The euro continued its decline against the US dollar, losing another two and a half cents. Since it set off lower at the beginning of the month the euro has fallen by 4.5%. It was a different story for sterling/euro; very much a game of two halves. Having risen by a cent and a quarter over the weekend in the early part of the week sterling turned tail on Wednesday and proceeded to give it all back. The pound opened this Friday morning unchanged on the week.

The only good thing to come out of Euroland in the last seven days was the Olympic torch, and even that looked bedraggled as it was handed over to the London organising committee. It is now easier to find an economist who believes in Santa Claus than it is to find one with faith that EU leaders will do what is necessary to keep Greece in the euro.

Amid the deluge of doom and gloom a few incorrigible optimists have dusted down an old theory and offered it as an alternative to the chaos and destruction peddled by the majority of analysts. The argument is that Greece is an expensive thorn in the side of Euroland: Getting rid of it out would save money and reduce irritation. Although it might have some merit, the notion has not exactly caught on with the mainstream.

One reason it hasn't struck a chord with investors is that one way or another, sooner or later, they believe Greece will have to admit defeat and leave the euro anyway, whatever the result of the next few weeks' voting and lobbying. When that happens the EU and its institutions are going to lose a great deal of money. Because the media cannot bear to allow such a thing to go unquantified, a number has been plucked out of the air; a trillion dollars or a trillion euros, depending on which side of the Atlantic the audience lies. It's a guess, of course, but a suitably scary one.

Developments during the week included;
- Confirmation that there would be a re-run of the Greek general election on 17 June and that the anti-austerity Syriza party was still ahead in the opinion polls.
- It emerged that last Monday, the day after the election, domestic depositors withdrew €800 million from Greek banks.
- The newly-installed François Hollande flew from Paris to Berlin immediately he had taken office. It was not an auspicious first outing for the president; he was deluged with rain, pushed around by Mrs Merkel and lightning struck his aeroplane.
- In Frankfurt the European Central Bank let it be known that is was "temporarily" not lending direct to certain (unnamed) Greek banks because they were undercapitalised. Should they need to borrow they would have to do so from the National Bank of Greece at higher rates of interest.
- Two agencies further downgraded the credit ratings of sovereign Greece and all Spanish banks.

The previously rampant pound was brought under control by the governor of the Bank of England. On Wednesday he delivered the speech with which he traditionally introduces the Banks quarterly Inflation Report. It was a sombre statement, including a lowered forecast for economic growth and a postponement of inflation's return to its 2% target. Sir Mervyn was at his gloomy best with dire warnings about how Britain would suffer if Greece were to make a disorderly exit from the single currency. So alarming to investors was his message that sterling was still smarting from it 48 hours later.

This weekend G8 leaders meet in Maryland. Three of them - Mr Hollande, Mrs Merkel and Mr Monti - are intimately involved with the Greek situation. Two, Mr Cameron and Mr Obama, have been vocal in their calls for the EU to avoid a catastrophe. The positions of Mr Medvedev (President Putin couldn't make it), Mr Harper and Noda San have received less publicity but it probably fair to assume they, too, would like to see a positive resolution of the problem.

Whether they will get one is a different matter, especially if the leaders of France, Germany and Italy would rather go hobnobbing at Camp David than sort out their own back yard. It does not look good for the single currency as we know it. Expect the dollar to make further progress against the euro and sterling to resume its climb once Sir Mervyn's sentiments have faded from the market's mind.

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Sarah Davie

On Monday the euro was trading a cent and a half higher against the US dollar than it had begun Friday. By this Friday morning it was three cents off its peak, nursing a net cent-and-a-half loss on the week. With sterling/euro the pattern was roughly similar but the range was narrower - less than two cents in total - and it resulted in no net change.

Something else that hasn't changed in the last seven days is the EU's official attitude to Greece. Following a dinner meeting in Brussels on Wednesday the mantra was the same as it has been since the abortive Greek general election raised the spectre of the country's departure from the single currency: Greece must stick to the austerity line if it wants to keep on receiving bailout loans.

Officially, again, Chancellor Merkel is dead set against the idea of "Eurobonds", government bonds collectively underwritten by all euro zone governments. Proponents of the scheme say they would solve the problem of some countries having to pay much higher rates of interest on their borrowings than others. For example, Germany was able this week to borrow two-year money at 0.07% annual interest. Today Spain would have to pay 4.07% for the same loan and the cost to Portugal would be 8.7%. Under the Eurobond proposal all would be able to borrow at the same interest rate; more than 0.07% but considerably less than 4.07%.

Mrs Merkel's objection is understandable. Eurobonds would effectively mean Germany guaranteeing the borrowings of its euro zone partners. Arguably it is already doing that with the various bailout arrangements but Eurobonds would drive home to German voters the enormity of the commitment.

Italy's prime minister, however, is optimistic that Mrs Merkel will come round to the idea. He said this week that he believes the chancellor can be persuaded to support the plan because Germany has a vested interest in keeping the euro together. More directly, Mr Monti said "Europe can have Eurobonds soon".

At the same time he said that he thought Greece would remain in the euro despite the chorus of doomsayers who claim it can't. He begged the question when he said "the most probable outcome is the one which is most positive for Greece and for all of us", and there was an element of ambiguity in his comment, but the sentiment was clear enough.

Away from the political arena opinions are more diverse. As for whether or when Greece will leave the euro and re-establish its own currency there are still as many opinions as there are commentators. In the last couple of days Jim O'Neill at Goldman Sachs said "If you really put a gun to my head I'd say Greece stays in", while Michael Saunders at Citigroup said it was odds-on that Greece would leave the euro within the next two years and "we assume Grexit [Greek exit from the euro] occurs on January 1 2013."

The debate and the uncertainty are likely to fester on until the Greek election on 17 June. Two things could set the euro alight before then; a decisive move by EU leaders to attack the problem or a run on Greek or Spanish banks. Either is possible and each would have its own, very different, consequences.

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Sarah Davie

Having covered a range of just under two cents the pound started this Friday morning about half a cent lower on the week against the euro. Along the way it was unable to match the previous week's high and it has been under gentle downward pressure since Wednesday lunchtime.

The more things change in Euroland the more they stay the same. At the end of this week the issues facing the euro are no different from the situation seven days ago: The Greek election which takes place in a fortnight's time could deliver another unhelpful result and Spain is strapped for cash. There is still no political consensus on solutions to either of the problems.

In Greece the opinion polls provide no stable picture of voting intentions. On consecutive days Reuters reported different prognoses. On Thursday it said the conservative pro-bailout New Democracy party was ahead of the leftist and anti-austerity Syriza by 25% to 22%. Today's story put Syriza ahead by 32% to 27%. The numbers suggest two possible outcomes: A Syriza victory that could result in the unilateral abandonment of austerity and Greece's exit from the euro or a repeat of last month's indecisive poll and a parliament so well hung that the country remains unable to form a government. The former would pose the most obvious and immediate threat but an extended period under a virtually powerless caretaker government would hardly be more helpful.

In Spain the banking sector's problem child, Bankia, continues to plague policymakers. It needs a €19bn cash injection to stay in business and other institutions are lined up behind it for similar assistance. But nobody has a clue where the money will come from. Normally it would fall to the government to provide the aid, as happened in Ireland. But the government's funding comes through the sale of its treasury bonds and pretty much the only buyers of those bonds are the very banks in need of assistance. (Of course the government also receives revenue in the form of taxation but that is not even enough to pay the existing bills.)

In essence, if Prime Minster Rajoy cannot devise his own scheme to recapitalise his country's banks he will have to go to the EU for a bailout. Thus far he has said he will not do that. With no sign of a solution to the banking sector's problems there is growing nervousness, not just among investors but also Spanish residents. Between them they withdrew €97bn of deposits from Spanish banks in the first three months of the year, €66bn of it in March alone. Some of it has gone to Germany, where investors are happy to receive a negative rate of interest on government bonds in return for the safety they promise. Some has left the euro altogether; British government bonds are returning record low yields as buyers push up their price. And some will have gone under Spanish mattresses, just it has gone under Greek ones.

There were uncharitable sniggers from Europe when Egypt announced this week that it was ending a State of Emergency that had been in force for more than 30 years. Those who mock should consider Europe's own Financial Crisis, which has been in force for four years already and could have several more under its belt. It might all have changed when Britain gets back to work on Wednesday but it probably will not have. A Jolly Jubilee to all.

Sarah Davie

Sterling has fallen by about half a cent against the euro since last Friday morning. It covered a range of just over two cents, bottoming out on Monday morning and peaking on Wednesday afternoon.

The pound took a downward lurch this Friday morning after speeches the previous evening by the Bank of England governor and the chancellor of the exchequer. At the Lord Mayor of London's banquet they outlined a new "bank funding scheme" in which the Old Lady will lend cheap money to the banks on condition they pass it on to individuals and small companies. The size of the programme is put at £140bn. Whilst it might succeed in reviving the retail lending market it is also akin to the Bank's earlier "asset purchase programme", in other words quantitative easing. Investors are not enamoured of quantitative easing because it means the metaphorical printing of new money and a dilution of the value of existing currency.

Investors are not exactly in love with the euro either. Last weekend Spain gave in to the inevitable and asked the EU for some money to rescue its troubled banks. Brussels swiftly agreed to chip in €100bn, the amount currently thought necessary to cover the needs of Bankia (€23.5bn and counting) and the other firms behind it in the queue. But whatever you do, don't call it a bailout. Prime Minster Rajoy is priggishly coy about the nature of the EU's assistance. Having only a week earlier denied the need for a bailout he strenuously avoid using the B-word. Rather, he boasted that the EU's financial contribution to Spanish banks was a "victory" for him and for the country.

His electorate might have been convinced but investors were not. Although the details have yet to be confirmed, their assumption is that the €100bn will come from the new European Stability Mechanism. If so, the loan will rank ahead of existing and future Spanish government bonds held by the private sector. In the case of default, ordinary investors would have to wait in line behind the ESM and the European Central Bank for their money. If they were reluctant to buy Spanish treasury bonds before, they were the more so after the bailout.

So, far from making investors better-disposed towards Spanish government debt, the bailout made them more wary. It also dampened appetite for Italian government bonds, the argument being that where Spain goes today Italy follows tomorrow. Within a few days Spain's ten-year borrowing cost had risen to 7% - a euro era high - and Italy had to pay 6.13% for eight-year money, up from 5.33% a month ago.

This weekend there will be another test for the euro when Greece holds its second general election in less than two months. The first was a washout with no party winning enough seats to form a government, even with coalition assistance. The second was too close to call when the last opinion poll came out at the beginning of the week. A win for the left-wing Syriza party would mean amelioration of the austerity regime and possibly the end of EU bailout money. A win for New Democracy, the other main contender, would mean business as usual with more economic shrinkage. A repeat of last month's no-result result would throw the whole country back into confusion.

What happens on Sunday will probably not lead to any dramatic practical change on Monday but it will have a significant and immediate effect on sentiment towards the euro. Which way that sentiment swings will depend on which - if any - party wins the election and what its leader says he intends to do.