Despite Tough Talk, Germany Eventually Will Back Down on Greek Debt

After the market mayhem of the last few weeks, it has become clear the
sovereign debt crisis across the Atlantic is not going away. It also has become
clear that Germany is mightily irritated with the state of affairs, and top
European officials are openly discussing the prospect of default for Greece. The
result has been a brutal selloff late last week, some very disturbing losses in
Europe this morning and a sharp decline for stocks at Mondays opening bell to
start the week. All told the Dow Jones Industrial average has given up over 5%
since its high of around 11,470 on Thursday morning. However, no matter how
panicked the stock market gets and how hawkish German Chancellor Angela Merkel
tries to sound, the end result will be another bailout for troubled euro zone
nations like Greece. That's because giving up on the troubled nation would end
up costing Germany far more than what it would save in relief funds. To be sure,
the prospect of a Greek collapse is very real. Credit-default swaps (essentially
insurance against the country sovereign debt) hit an all-time high of 3,500
basis points before the weekend. A hundred basis points equal 1%, so that's a
premium of 35% on these policies the highest in the world and more than three
times the rate on Portuguese debt. The market clearly believes the default risk
is severe perhaps even likely with rates like that. But after two years of
grinding it out with Greece and the PIIGS zone (Portugal, Italy, Ireland, Greece
and Spain), Germany is too deep into this mess to walk away despite posturing
about laying the groundwork for Greek default. Last week we saw escalating
German threats that Greece won't get the money unless it meets austerity
targets, but you can only get so much blood from this stone. And while Merkel
and the rest of Europe might be inclined in weaker moments to just wash their
hands of this mess, it would send a troubling message to the rest of Europe and
to global markets if Greece is allowed to default. Investors will worry that
Germany could abandon Portugal and such fears could make the event a
self-fulfilling prophecy as rates soar and credit markets fail to function in
Portugal. Then after Greece and Portugal, other nations like Spain could be put
on an iceberg and pushed out to sea by global investors. The dreaded buzzword
"contagion" could become a reality. So there's really no other choice for
Germany than to head this mess off and accept the lesser of two evils by bailing
out Greece again. It will be painful for Germany to belly up to the bar and pay
for the tab. But the ensuing chaos would be far worse for the euro zone in the
long run. Whether the bailout will do anything to cheer up the market, however,
is a much different story. Someone is going to have to pay these debts
eventually, and both taxpayers and financial stocks are spread pretty thin right
now. Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter via
@JeffReevesIP and become a fan of InvestorPlace on Facebook .