cnbc anchor freaked out by fabers comments , page-7

This EU Greek bailout is beginning to look like an episode of Faulty Towers with the Greeks, Germans, French, Spanish - everyone in it.

Why not just let Greece go under? Part of the argument has to do with moral hazard. If Germany bails out Greece - Ireland, which is actually making cuts to its budget, can legitimately ask, "Why not us?" Portugal - "Me too!" Spain? Hmmm - too big for even Germany to bail out. Spain banks are in bad shape, with large amounts of overvalued real estate on their books (sound familiar?)

The fear is one of contagion. Some argue that Greece is only 2.7% of European GDP. But Bear Stearns held less than 2% of US banking assets, and look what happened.

The largest holders of Greek debt are the French, followed by the Swiss and then the Germans. Make no mistake, a Greek default is another potential credit crisis in the making.

It is not just the writedown of Greek debt, it is the mark-to-market of other sovereign debt that would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen.

The entire EU is faced with no good choices. It is coming down to that moment of crisis predicted by Milton Friedman so many years ago. And there is no agreement on what to do.

The 27 leaders never even discussed how they might shore up Greece or the rest of Club Med. German Chancellor Angela Merkel said she was not willing to broach the subject at all.

Merkel has problems on the home front. There are reports she is putting the brakes on a bailout, as she is getting pushback from her constituency. The Frankfurter Allgemeine Zeitung warned the chancellor yesterday that offering Greece any kind of bailout would be a betrayal of the trust of the Germans who so reluctantly traded in their marks for the euro.

Oh dear! What to do now - hand out the life jackets and crash helmets!

Ref: Greece's national suicide pact.