By: Dr. Mike Campbell

Clearly, the Greek patient is ailing. Financial spin doctors in Germany and France seem certain that a further injection of cash will be needed to avoid a Greek default and behind the scenes discussions are going on at the European level to secure the required funds.

The issue of financing sovereign debt is all about confidence. Nations such as the USA, Germany and Japan are perceived to be at negligible risk of a default on their borrowing and so the interest rates that they need to offer are low. The market perceives the risk associated with a Greek bond as being very high now and consequently, were Greek to approach the bond market for further funding, it would be charged punitive levels of interest – this was the issue which prompted the IMF/EU bailout in the first place.

German and French leaders have publically stated that they would like to see the private sector participate in the next phase of treatment. The notion has generated consternation in other quarter of Europe with the Luxembourg Prime Minister, Jean-Claude Junckers, suggesting that such a move was “playing with fire”. Mr Junckers serves as head of the Eurozone finance ministers group.

The German and French governments would like to see the private sector share the burden of the sovereign debt crisis – after all, if an investor buys a commercial bond and the issuer gets into trouble, they have to take the hit. However, putting your money into state debt is not quite the same as a commercial venture, somehow. The Germans and French would like investors to allow their Greek bonds to roll over, on a voluntary basis. However, Fitch’s rating agency has declared that such a move could not be truly voluntary and that should it happen, they would consider that the bonds in question were in default with all of the consequences that such a declaration would have.