The future of the euro may be determined in the coming weeks, asGreek voters decide whether to honor the country's internationalbailout and create a first test for Spain's newly built 100billion-euro ($125 billion) banking firewall.

With Greece going to the polls in six days, the most recentsurveys showed the main party opposing the terms of its bailoutvying for first place. The government in Athens has “a few weeks”before exhausting its funds, making this is “a make-or-breakperiod,” former Greek Prime Minister George Papandreou toldBloomberg Television in a June 8 interview.

The European debt crisis, now in its third year, reached a newmilestone after Spain abandoned unilateral attempts to rescue itsbanks and became the fourth country in the 17-member currency unionto seek an emergency bailout. The aid blueprint hammered out in anemergency conference call among euro finance chiefs two days ago isdesigned to create a line of defense if the Greek vote unleashes anew bout of market turmoil.

“We are approaching a moment of truth for the euro zone,” U.K.Chancellor of the Exchequer George Osborne wrote in the SundayTelegraph yesterday. “After more than two years of uncertainty,instability and slow growth, decisions taken over the next fewmonths could determine the economic future of the whole Europeancontinent for the next decade and beyond.”

Markets retreated from earlier highs after initially surgingfollowing the announcement of Spanish aid. Spanish 10-year yieldsrose 23 basis points to 6.4 percent as of 1:37 p.m. in Madrid afterearlier falling to as low as 6.02 percent. Similar Italiansecurities rose to the highest in a week.

Polls show the June 17 election in Greece may be a close race.New Democracy, Greece's largest pro-bailout party, led anti-bailoutSyriza by 22.7 percent to 22 percent, according to an ANT1 TV pollon June 1, the last date surveys were made public. An election onMay 6 failed to produce a viable governing majority.

Syriza's leader, Alexis Tsipras, has pledged to keep Greece inthe euro while scrapping bailout terms in order to end the hardshipbrought on by austerity. Meanwhile, pro-bailout proponents, such asNew Democracy leader Antonis Samaras, have framed the contest as adecision on whether to leave the euro area. A departure wouldtrigger hyperinflation, a bank run and widespread poverty, Samarashas said.

'Splintering of Europe'

The currency bloc, which at its setup in 1999 capped Europe'sprogression from war to prosperity, was declared irreversible byits founders. European Union treaties make no provision for acountry to withdraw from the currency and the European CentralBank's legal department said in December 2009 that an expulsion“would be so challenging, conceptually, legally and practically,that its likelihood is close to zero.”

“This is the point where we have to make the decision,”Papandreou said in the interview, aired on Bloomberg's Inside Tracktoday. “If we don't, I believe we have a small window of time — thenext few months — and maybe if we have that — before we see asplintering of Europe. So this is a make-or-break period.”

After Spain became the latest bailout recipient, Italy movedtoward the front line of the debt crisis with its more than 2trillion euros in debt, placing pressure on Prime Minister MarioMonti's unelected government to avoid a market rout.

As the Greek election result is declared, leaders of the Groupof 20 most industrialized nations will be preparing for discussionson the threat of the debt crisis at a summit meeting in Los Cabos,Mexico. The June 18-19 gathering will be part of a series ofmeetings on the euro crisis culminating in an EU meeting inBrussels at the end of the month, which might present a “masterplan” drawn up by officials including EU President Herman VanRompuy and ECB President Mario Draghi to hold the eurotogether.

President Barack Obama kept up his pressure on European leadersto take “decisive” action to bolster growth and tackle debt,telling reporters June 8 at the White House that the euro crisis isincreasingly becoming a drag on the U.S. economy.

The euro area needs an overhaul, ECB Council member JensWeidmann told Welt am Sonntag in an interview publishedyesterday.

'More Clarity'

“The currency union can't function sustainably the way it is atthe moment,” Weidmann, who is also Bundesbank president, was citedby the Berlin-based paper as saying. “We need more clarity if wewant to go down the route to a fiscal union, or if we want to keeprelying on self-responsible national budget policies. In the lattercase, the common liabilities need to be narrowly limited.”

The Spanish bailout, which was announced June 9 after athree-hour conference call of European finance ministers, may offera salve to markets ahead of the Greek vote.

Spanish government bonds posted their first weekly gain in amonth and the country's borrowing costs retreated last week amidoptimism European leaders were preparing a bailout for Spanishbanks.

“With the Spanish bailout at least we've bought more time andhelped to ring-fence Greece,” Carsten Brzeski, a former EuropeanCommission economist who works for ING Groep NV in Brussels, saidyesterday in an interview. “It gives much more breathing space tocome up with this 'master plan'.”

That plan may involve a menu of proposals suggested by Europeanleaders over the past weeks, including the possibility of a moreintegrated banking system, with euro-wide mechanisms such asdeposit insurance leading to a so-called fiscal union.

Spanish Prime Minister Mariano Rajoy, who as recently as May 28said he wouldn't seek a bailout, yesterday characterized theweekend deal as a credit line for banks and an endorsement of hispolicies. Rajoy was forced to back off his pledge that thegovernment would re-capitalize the banking system on its own afterforeign investors scaled back their holdings of Spanish debt.

“If we hadn't done what we've done in the past five months, theintervention of the Kingdom of Spain would have been on the tableyesterday,” Rajoy told reporters in Madrid. He stuck to plans tovisit the European soccer championship in Poland because thesituation is “resolved.”

Spain is twice the size of the three economies that have soughtbailout assistance so far — Greece, Ireland and Portugal. The fundswill be channeled through the state-run FROB bank-rescue fund, andwill add to Spain's debt, which was 68.5 percent of gross domesticproduct last year.

The bailout adds to the 386 billion euros in bailout funds fromEuropean governments and the International Monetary Fund have madesince 2010.

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