The whole world nervously awaits the outcome of this weekend’s Greek election results


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.

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The whole world nervously awaits the outcome of this weekend’s Greek election results

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