I have a strong suspicion as to the core reason that the EU members are having so much trouble saying “No” to Greece, even though they know that they should and they know that their people are demanding it. If they refuse to prop Greece up, Greece simply defaults on all of it’s bonds and other debt obligations. This isn’t actually a bad option for Greece, since although they would have to live within their means, after a default they don’t have any more debt service to worry about and they probably could manage, plus they would have a good reason to convince everyone that the cutbacks were unavoidable.

It’s hard to justify cutbacks to the voters when billions are being sent outside the country every month just for interest payments – a problem coming soon to a country near you, btw.

So since this is actually a pretty reasonable solution, and since it is probably going to happen anyways before too long, how come the EU is so scared to stand back and let it happen?

Ah, here’s the rub, and the true key to the problem: the vast majority of those bonds and debt obligations are held by EU Banks. They hold so much, in fact, that quite a few of them will go bankrupt and need to be bailed out if Greece defaults. It’s the old story – owe the bank $100 and can’t pay, it’s your problem, owe the EU Banking system a couple hundred billion or so and it’s the EU’s problem.

So, as long as bailing out Greece is cheaper than having to bail out all of their major banks which will fail when Greece defaults, then it makes economic sense for the EU to bail Greece out no matter how humiliating and painful it is to do that.

http://www.guardian.co.uk/business/2010/feb/11/greece-debt-france-switzerland

“France and Switzerland have $79bn (£50bn) each of exposure to Greece, according to American-sourced data from the Bank for International Settlements analysed by the Swiss bank UBS. Germany’s exposure is $43bn.”

(regarding Marie Claude’s remark that the French were not particularly skilled bankers….)

“The French bank Crédit Agricole was singled out by analysts at the research firm ­CreditSights as being particularly exposed. “It owns Emporiki Bank in Greece, which has been floundering away, and has about €23bn in loans there,” Credit­Sights ­analysts said.”

“The collective exposure of the banking systems to the Pigs is $2.9tn. The bulk of that exposure is located in the banks of France, Germany and the UK,” the UBS analysts said. “The exposure is particularly concentrated in the French and German banks, which have 24% and 21% of their foreign total claims harboured in these countries. This is one reason why France and German are so quickly mentioned as countries likely to support or participate in a bailout.”