Greece rescue rocking Europe's foundations

A FINANCIAL rescue package for debt-strapped Greece looked increasingly inevitable as the interest rate on Greek bonds soared last week. The country's debt stands at nearly 300 billion and it has to find about 11.5bn (£10bn) by next month to meet its obligations. So the news that leaders of the 16 eurozone countries have agreed to fund up to 30bn will be seen as progress of sorts.

However, final agreement will require Greece to make a formal application for assistance – a step it has been notably reluctant to undertake. The final deal will also need to reassure eurozone members that they are not underwriting moral hazard.

The affair has brought two highly sensitive issues to the fore. The first is the involvement of the International Monetary Fund in helping to defuse a financial crisis within the eurozone. Many in Brussels will find this a humiliating admission of failure and a breach of sovereignty for the common currency.

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Equally sensitive is the precedent- setting nature of any agreement and whether this sets a standard by which member states are ultimately liable for the debts and deficits of others. Already there is talk of a challenge to German Chancellor Angela Merkel in the German Constitutional Court. The mooted interest rate on the loan is about 5 per cent, well below the 7.5 per cent rate prevailing on Greek government bonds.

The precedent of a subsidised rate suggests this crisis may have some way to run.