I’m not sure that “very unlikely” is the best characterization of the situation (also, I’m not sure where it “was being mentioned”, point #4 explicitly mentions a bailout possibility). Perhaps Greece can stabilize its finances, perhaps it can’t, I’m not sure anyone knows for sure. You’re right that if Germany tries to bail out Greece, only to have Greece default in two years, Germany will have only made the problem bigger. How much bigger? About 25%.

Assuming contagion can be contained, then it’s a question of whether having a Probability=1 chance of cleaning up 100% of the mess now is better than having a Probability=?? chance of cleaning up 125% of the mess in two years. If you think the probability of Greece defaulting even with a bailout is higher than 0.8, then it would be “cheaper” to clean up the mess now.

Another consideration is that the world financial system is still quite fragile. Perhaps it would be better to bailout Greece for the time being to let the banks build up their reserves for two years before Greece’s inevitable default? Felix alludes to this in his latest post
http://blogs.reuters.com/felix-salmon/20 10/04/28/roubini-on-greece/

These figures are explained[7] in the light of the arms race between Greece and Turkey with key issues being the Cyprus dispute and disagreement over sovereignty of certain islets of the Aegean. For more information see Greco-Turkish relations. Reversly, the foreign relations of Greece as well as many internal policy decisions are largely affected by its arms purchases. The United States, being the major arms seller to Greece has been known to actively intervene in military spending decisions made by the Greek government.[8] The US has at times actively stepped in to help avoid large scale crisis, as in the case of the Imia-Kardak crisis.

The reduction of military spending has long been an issue in Greek politics. The former prime minister, Kostas Karamanlis had proposed a reduction to military spending through a “Defence Eurozone”,[9] referring to the European Security and Defence Policy. The previous PASOK administration, also planned on reducing military spending[10] prior to its failure to be re-elected in 2004, while PASOK politicians usually refer to money saved from reducing military spending as a “peace dividend” (“μέρισμα ειρήνης”).[11] The parties of the Left, KKE and Synaspismos, have been vocal in condemning military spending. Regarding the purchase of 30 F-16 and 333 Leopard tanks in 2005, both parties criticized the New Democracy administration for spending money on weapons while doing nothing to relieve the lower classes and said that high military spending “does not correspond to the real needs of the country but is carried out according to NATO planning and to serve weapon manufacturers and the countries that host them”.[12]
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Greece is going to bailed out by money from Ireland, Portugal and Spain among others? How is that going to work?

All conversations presume that the Germans are on board. As Ambrose Evans-Pritchard, among others, has plainly commented the Germans are NOT on board.

Portugal already has the signs and symptoms of the Greek disease. See my first paragraph.

All conversations presume that sovereigns can never run out of other people’s money (OPM). Is that true? Is there some limit past which even sovereigns cannot borrow and spend?

I see the problem with contagion, the problem being that Spain would, in the end, have to default, because it is too big to save.

Greece’s annual funding needs are on the order of 50 billion Euros. It’ll be cheaper to fund Greece for 2 years than bail out the European financial industry, and a lot less risky. And could stave off contagion.

Let me promise you that US debt will not become cheaper to issue after a greek default. The next time a 1st world soverign defaults will be the first time.

At that point the rules change. The risk free rate is no longer risk free and new finance text books get written with hard assets like gold drop below cash on the risk / reward efficent frontier.

Let us pray that Greek does not default!

Good luck in interesting times!

Felix- there was a good piece put out by Barclays earlier today, and discussed on FT Alphaville, showing that if Greece gives a 90% guillotining (because you can hardly call that a haircut), they still need a 7.5%-of-GDP fiscal consolidation to stabilize debt-to-GDP. No Eurozone country has ever pulled off a positive 7.5% swing in the primary balance over a three year period.

Accordingly the only way for Greece to become solvent is to exit the euro, and given all the obstacles the Eurozone has put in the way, that will likely be about as orderly as Argentina’s exiting the “convertibility” regime.