Greece Gets Rescued From Its Debt ... Sort Of

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The European Union will give debt-plagued Greece a helping hand, maybe. In a statement, E.U. President Herman Van Rompuy (pictured) said that "euro area members will take determined and coordinated action if needed to safeguard stability in the euro zone as a whole." However, no details of the arrangement will be announced until the end of Thursday's meeting of the 27 leaders of the E.U. nations.One of the things that Van Rompuy did make clear is that there will be no outright rescue of Greece. Commenting on the nature of the arrangement, MarketWatch wrote "The European Commission and the European Central Bank will monitor Greece's budget cutting efforts -- a first assessment will come in March -- and the International Monetary Fund will provide technical assistance." In other words, no money is likely to go to directly to Greece to help it cover its sovereign debt. However, there is a chance that the E.U. or its most financially powerful members, France and Germany, may offer loan guarantees to the embattled southern European nation.

If they did so, Germany and France would be acting to a large extent in their own self interest. Some estimates put the exposure to Greek debt by banks headquartered in those two countries at 85 billion euros. Greece still needs to raise roughly 54 billion euros in the capital markets this year to cover its deficits. If it cannot, the value of those bank holdings will be at grave risk.

The offer by the E.U. to back Greece as its tries to work its way out of its financial mess still faces hurdles, one of which is beyond its borders. The first is that Greek labor unions are disinclined to support spending cuts by the government and have begun to strike. These labor stoppages could do more to unsettle the Greek economy, making it even harder for its government to meet its obligations. The second is that the EU is unlikely to give the nation loans or capital outright because of what many economists view as a "moral hazard" within the European community. If the stronger nations within the alliance help Greece, it might tempt other financially weak EU countries, including Spain and Portugal, to ask for assistance as well.

The E.U. announcement may calm the markets, but the details of a rescue of Greece are far from done.
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