Greek Bailout Nears, Germany May Provide Aid

Greece, its sovereign debt crisis worsening, will probably be bailed out by some combination of European Union nations that will guarantee some of the faltering nation's debt. The EU is considering a plan that would be led by Germany because of the size of its economy and relatively strong national finances.Several media reports say a plan could be in place within days. The Wall Street Journal reports that the rescue may extend to other weak economies including Spain and Portugal. Several European nations fear that the aid to Greece could cause a sort of "moral hazard" that would cause other weak nations to threaten to default on sovereign debt if they don't receive loan guarantees as well. The paper writes, "That the EU members are nonetheless considering such a step suggests that policy makers view the alternative -- a potential default of a euro-zone country -- to be an even worse outcome and one that could have grave consequences for both the European and global economy"

The plan to use Germany as the primary source of aid for Greece isn't set in stone. The alternative is for the aid to come from the International Monetary Fund. Former Bank of England policymaker Charles Goodhart toldBloomberg: "I would ask the IMF to come in. From the European point of view, it's the least bad option."

The fact that the EU is still debating how Greece should be rescued doesn't change the fact that a rescue is likely. Germany has reason to worry that its largest banks could be hurt by a default of Greek debt. To that extent, the nation with the largest economy in Europe would be acting in its own interest.
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