The media fixation with Egypt meant that the news of an extra €15 bn of bailout funds given to Greece last week did not receive the attention it deserved. Markets hammered Portuguese bonds last week due to concerns that Lisbon may need a bailout like Greece. Portuguese bonds now trade 4.1% over bunds so Portugal's funding costs are more than twice that of Germany. So far the Euro has held up on the Forex markets but there is another worry.
Trichet is soon due to step down as ECB governor and both the 'sound money' German candidates have said they will not apply for the job as the PIGS dominated governing ECB council will not support sound money policies. The Germans know what hyperinflation means which is why they have been totally opposed to the ECB buying PIGS sovereign bonds. This just inflates the money supply and inevitably leads to price inflation. It reduces the PIGS debt in real terms and shifts the pain onto the PIGS debtors.
It is a short term politically easy solution that in the longer term simply leads to higher interest rates and yet more inflation. The UK and US are doing the same thing calling it quantitative easing hence the increasing number of articles in the UK press warning that higher interest rates are coming very soon.
The crunch will come I expect if the current new favourite for the ECB job, an Italian, is appointed with support of the other PIGS. Euro interest rates have stayed low on the back of the German view on sound money dominating ECB policy. Italy has an appalling inflation record and its monetary history is littered with bond defaults. Pre - Euro Italian rates were 10% plus. With an Italian running the ECB I expect Euro rates to rise substantially and the currency to devalue.
The principal political effect will be in Germany and there is now a significant probability that Germany will de facto leave the Euro. No German politician could survive being identified with Italian style monetary policy!