Face it: The EU won't let Greece out of the euro zone

Although many EU nations have had enough of Greece and their backsliding on austerity measures, a consensus seems to be emerging that no matter what, Greece can't be allowed to default and the EU can't kick them out of the euro zone.

This may not have been the case a few months ago. But continued weakness in the Spanish and Italian economies, making them vulnerable to the contagion if Greece were to exit the euro, seems to have convinced most of the euro zone that they must stick with Greece come hell or high water.


[A]s ever, the devil is in the detail, and in Greece's case the details are devilishly difficult.

That is why ongoing efforts by the European Commission, the European Central Bank and the International Monetary Fund -- together known as the 'troika' -- to work out Greece's long-term growth and debt reduction prospects are so critical.

Everyone from German Chancellor Angela Merkel to ECB President Mario Draghi and Greek Prime Minister Antonis Samaras -- who wants two more years to make the cuts demanded of him -- is nervously awaiting the outcome of the troika's report, which is expected in late September or early October.

If it concludes that Greece is moving in the right direction, with the potential for growth and long-term debt-reduction slowly improving, everyone will breath a sigh of relief, even if a multitude of obstacles remain.

If, as appears more likely given the noises emerging from EU officials, the troika finds Greece is not doing enough and has no realistic prospect of whittling away its debts in the coming decade, then a moment of truth may finally have dawned.

With plans afoot for the euro zone rescue funds and ECB to protect Spain and Italy by intervening to lower their borrowing costs, it would seem perverse to let Greece crash out of the currency area now, unleashing a wave of contagion that would take the crisis to new levels.

Instead, there is likely to be a scramble to find a way to give Greece more help which does not look like it is landing the bill with the German taxpayer, something the Bundestag would be likely to reject.

Samaras hinted at that equation after talks with Merkel last week. "We're not asking for more money. We're asking for breaths of air in this dive we are taking," he said.

Samaras is whistling past the graveyard if he thinks an extension of the bail out terms won't cost the ECB more cash. What he's hoping for is that the increase in support can be masked so that it doesn't appear that Greece is getting more money. Another hair cut for Greek debt holders may be in the offing, or perhaps the ECB could purchase Greek bonds directly - although that may be declared illegal by a German court next month. Merkel would probably be grateful if such sleight of hand would be successful, but will balk at anything that smells of giving Greece additional funds to manage its debt.

As long as a Greek collapse would likely mean big trouble for Italy and Spain, the EU will do everything in its power to keep Athens afloat. A bail out of those two huge economies would drain the emergency bail out mechanisms already in place and lead to a general exit from the euro.

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