France and Germany are considering ways to help Greece, according to Le Monde, but this doesn't mean a bailout is imminent. Last spring, when Greek bond spreads widened sharply, Germany's then Finance Minister Peer Steinbrueck hinted that Germany would have to offer financial help if another euro-zone country runs into serious trouble.

The first question: is Greece in serious trouble? Its bonds spreads have widened sharply and the cost of insuring its debt has hit new highs, but the country's sale of five-year bonds earlier this week was oversubscribed heavily. Investors haven't abandoned the country in droves, which is what pushed other EU countries, including Hungary, Romania and Latvia to seek international support during the worst of the economic downturn.

The second question worth asking: are EU policy makers willing to let Greece suffer a little? Absolutely. Greece is paying about 3.5 percentage points over benchmark rates in order to borrow, which is a hefty tax on the country's already strained public finances. But EU officials in Brussels note that a bailout might encourage "moral hazard," allowing yet another Greek government to skirt much-needed reforms.

The bloc's finance ministers and bureaucrats justifiably feel duped. Greece is a serial budget offender and revisions to a decade's worth of data suggest the country shouldn't have been allowed to enter the euro zone in 2001.

For the moment, there is no real appetite among EU policy makers for a Greek bailout package, even if contingency plans are being discussed. In the wake of the financial crisis, the bloc has learned the merits of being prepared and avoiding the kind of ad-hoc, last-minute wrangling that characterized its handling of failing lenders and shaky bank deposits. EU policy makers now are considering legislation to ensure crisis-hit banks have contingency plans, or so-called living wills, so why shouldn't they draw up similar plans for governments facing financial meltdown?

When pressed last spring on what the EU would do if Greece faltered, European Commissioner for Economic and Monetary Affairs, Joaquin Almunia, said "there is a plan," but he refused to elaborate. Why? Like now, Greece was in trouble, but it wasn't on the brink of disaster. Most importantly, its problems were its own fault.

Still, it seems the EU - likely led by Germany and France, the largest economies in the euro zone - will help Greece if it nears default. The credibility of the euro, perhaps the bloc's grandest project and still a young one, is more important than a simple moral lesson for spendthrift politicians.

Eoin Treacy's view The developing situation with regard to whether Greece will default on its debt or not raises more questions than answers. My first question is who owns the majority of Greek debt? Is it mostly held in the domestic market, by other European countries or internationally? Is it correct to compare Greece, as a sovereign market that needs to meet the fiscal restrictions imposed by the ECB, to problems with a state's relationship to the Fed in the USA? If Greece defaults will it have to be ejected from the Euro? We don't have the answers to all of these but we would welcome informed input from the Collective on the subject. (Also see Comment of the Day on January 21st).

The recent sale of Greek bonds was oversubscribed by five times but was badly received in the secondary market. Government bond yields across the yield curve (10yr, 5yr, 2yr) have accelerated sharply in the last few weeks. 5yr CDS spreads are in the region of 400 basis points and the spread of the Greek 10yr over the German 10yr is at 370 basis points which is the highest since 1998. Acceleration is an ending signal and this rapid advance in the risk premium cannot persist indefinitely. However, downward dynamics are needed to check these trends beyond a brief pause and to signal demand for Greek bonds is returning to dominance.

The situation is rapidly coming to a head in what is turning into a true test of the Euro's viability as a currency capable of serving economies with vastly different growth rates and records of fiscal responsibility. If Greece is to remain within the Eurozone, the path to recovery is likely to be lengthy and will have to include a thorough reworking of attitudes towards economic, fiscal and corporate governance. Right now, the bond markets are signalling their disbelief as to whether this is a realistic possibility, but the attitudes of the ECB and some of the EU's larger members such as Germany and France are equally important.

Losing a member of the Eurozone is not something they want to see happen because it would damage the big picture quasi federal integration of the continent and raise the potential for an opt-in / opt-out mentality among serial deficit offenders. However, they are also seeking to avoid the moral hazard of allowing a sovereign default within the currency union. If this were allowed to occur with Greece, what would stop countries such as Spain, Portugal, Ireland or others from avoiding their fiscal responsibilities and defaulting on their debt? It could well lead to an end to the single currency.

The ECB has already demonstrated that it is willing to make funds available to countries willing to take the steps needed to bring deficits under control. The central bank has been a large purchaser of Irish debt at least in part because of a commitment to cut spending and raise taxes by the Irish government. Greece is being afforded a similar opportunity provided it continues to make credible representations that it is serious about getting its fiscal house in order. Here is a section from an interview Jean-Clause Trichet gave to the Wall Street Journal on the 26th supporting this assessment:

Question: Do you think that it might make sense to have some kind of mechanism within in euro zone to allow the ECB or some other body in the EU to take more control of a country's budget as a way of giving the markets more confidence and helping guide that country, such as the case of Greece?

Mr. Trichet: The Governing Council of the ECB has always been very vocal, very strong in defending the Stability and Growth Pact at a time where some governments were opposing the Pact and wanted to dismantle it. We call for a rigorous implementation of the Stability and Growth Pact by all countries. We also call for all data, facts and figures to be audited appropriately at national and, when judged necessary, at the European level by Eurostat. I expect the European Commission to take very soon a number of proposals in that sense

As an example at the moment we see one government - the Irish government - is looking energetically at what it has to do. Ireland was in a situation that was difficult and a number of courageous and convincing decisions have been taken.

I expect and I am confident that in the demanding situation in which Greece is, its government will also take the right and necessary decisions to implement the goal which has been fixed, namely to have a public deficit below 3% (deficit as a share of GDP) as early as 2012.

Question: Do you think that's realistic?

Mr. Trichet: It is what the Government has committed to do. I trust it is not only realistic but also necessary in the present demanding circumstances to take the right decisions to meet the goal. I approve the ambition. I approve the 2012 deficit target of below 3 %.

As with so much in financial markets, the key to a successful navigation of this crisis by the Eurozone, and especially Greece, will be credibility. Right now, the Greek government needs to foster this most precious of resources. They need to stand firm against domestic resistance by vested interests or risk losing the initiative and access to European funds. The acceleration in yields suggests that we will not have to wait long for a verdict from the market as to whether they are successful.