BBC: “EU deal ‘agreed’ on Greece debt woes”

The BBC is reporting that the EU is nearing a deal to have members of the Eurozone either bail out Greece or provide loan guarantees.

The risk of such a bailout is the moral hazard: sovereign debtors in the Eurozone can take more risk without fear of default because the sovereign can count on others in the Eurozone bailing them out; and concurrently creditors can take greater risk (over)investing in Eurozone sovereigns on the basis that their investment is insured by other sovereigns who would intervene with a bailout to avoid a run on the Euro.

The risk of not bailing Greece out is contagion, as per the article:

The BBC’s economics correspondent Andrew Walker says a default by any of the high-deficit eurozone countries would hit banks in Europe which hold government debt. The risk is that the contagion could trigger a rapid decline in the euro’s value, he says.

Advertisements