France and Germany determined to protect euro

- Central bank debt write-down under consideration
- Italian 10-year bond auction today

Researchers have discovered that Britons have an average of six keys on their key-ring. They use five of them regularly but can't remember what the sixth is for. Now imagine how many keys there are for Wembley stadium. There must be hundreds of them. You'd need a wheelbarrow to move them around. But somebody has nevertheless managed to lose them. And there's only the one set because they can't be copied. It will apparently cost £50k to replace the locks and make the place secure. 

It will cost orders of magnitude more than that to make the euro secure. Even so, the leaders of France and Germany have given their support to the European Central Bank's determination to do "whatever it takes" to save the single currency. In a joint statement at the weekend they said "Germany and France are deeply committed to the integrity of the eurozone. They are determined to do everything to protect the eurozone". 

They did not specify whether or not that integrity would necessarily involve Greece, only that "member states ... must fulfil their obligations". Chancellor Merkel is opposed to any new bailouts for Athens and her economic minister Philipp Rösler warned ominously at the weekend that "If Greece does not fulfil its obligations there can be no more money. Then Greece would be insolvent." 

Despite that apparent intransigence, Berlin is said to be giving consideration to debt forgiveness. When the restructuring of Greek government debt went on earlier this year private sector bondholders lost around 70% of their original investment. EU central banks and the ECB received preferential treatment, suffering no write-down at all. The thought now is that those central banks will share the pain, writing off another €70bn of Greece's obligations. 

Writing off more of Greece's debt will not of course do anything to improve investors' appetite for Spanish or Italian government bonds. The financial world is expecting to see serious action by the ECB this Thursday to rebuild that appetite; either another dose of cheap three-year money for banks to spend on government bonds or the direct purchase of bonds by the ECB itself. 

In the meantime investors are holding their fire. Following the euro's rapid ascent last Thursday it has gone almost nowhere. Compared with Friday's opening levels the euro, the US dollar and the Japanese yen are unchanged this morning. Sterling is firmer against them all by about a third of a cent. 

Friday's German inflation (1.7%), US economic growth (0.4% in Q2) and Michigan consumer confidence index (72.3) had minimal effect on exchange rates. Today's ecostats have equally little potential. UK monthly mortgage approvals will probably not be far from 50k, as has been the case for two and a half years. Euro land business confidence seldom attracts much comment. The CBI's distributive trades survey of UK retail sales is unlikely to come close to last month's 42% reading.

This morning the Italian government will sell up to €5.5bn of 10-year bonds. Will investors be inspired by the determination of the EU leadership to preserve the euro or will the yield be above 6%?