Greek Fire, Part 4

The Greek Fire is spreading, and everyone is now counting on Germany to engineer a firewall to save the Eurozone's economy from a Greek default.

A German government official said that the steep decline in the euro and pressure on bond prices had forced Berlin to “take a significant step” in how to deal with the crisis.

Germany is worried that any flight out of Greek assets, especially government bonds, could hit its banks and those in other eurozone countries.

As the eurozone’s dominant economy, Germany would be expected to take the lead in marshalling financial support for a Greek bail-out. There are fears the crisis could spread to other eurozone states with big deficits such as Spain and Portugal.

“We’ve had to face up to the fact that what is now a Greek problem could turn into a European one,” the official said.

”We’re thinking about what we should do if the crisis spills from Greece into other euro countries. So it’s more about finding firewalls, containing the problem, than principally about helping the Greeks.” He added there were ”no concrete plans” as yet. 

The Germans are anything if not practical pragmatists.  If Greek debt is worrying them to the point where even they have to believe there's no other way out, then they will get it done.  But the Greek Fire has spread that far, that quickly, and the German response shows just how dire the situation really is behind the scenes.

The problem is Germany's about the only other country in the Eurozone that can afford to help.  The UK and Sweden aren't so happy about this plan:  they have their own problems.  They think the IMF needs to foot the bill.

Non-euro zone countries, led by the UK and Sweden, yesterday broke from the public position of Germany, France and other euro area states by suggesting that, if Greece required help, the International Monetary Fund was best placed to supply it.

A Swedish official said: “The IMF has the technical know-ledge”.

Officials in London suggested that the risk of financial contagion from the Greek crisis meant that it should not be regarded as a matter exclusively for the 16 euro zone countries.

The reasons why markets are up is the moral hazard of Too Big To Fail.  Investors know Greece will be bailed out by somebody.  They're just not sure who yet.  That's a hell of a detail to find the Devil in.