EU agrees to let Greece 'default'

In exchange for more loans to Greece, the European Union has agreed to let it technically default.

Here's how this played out:

In a declaration crafted here after hours of haggling, and a whirlwind trip Wednesday to Berlin by the French president, the leaders put forward billions more in new loans to Greece. But they extracted a price: Greece's private-sector creditors will accept a bond exchange that gives them less than originally promised. ...

Greece was reeling under its huge burden, and its woes were threatening to engulf other countries.

To push back against that contagion, the euro zone also agreed Thursday to a wide expansion of its €440 billion bailout fund. ...

"We created a solid firewall and better fire-brigade equipment," said Herman Van Rompuy, the European Union president.

That creation had been a long time coming. In spring of 2010, when the euro zone was debating the first Greek bailout, the countries—at the firm insistence of Germany— insisted that rescue loans would come only when absolutely needed, and would be issued at punitive rates to discourage countries from slacking on reforms and falling back on cheap aid.

Germany has made a stark reversal. Chancellor Angela Merkel, once the euro zone's "Madame Non," led a push to assemble the new Greek bailout program. In the face of stiff domestic opposition to creating what the German press dubbed a "Transferunion," she opened the door to far greater fiscal aid than her country had once contemplated. In return, she won a commitment that banks and other creditors—and not just taxpayers—would have to bear some of the burden.

Here's the details, with euphemisms, of how this will allegedly work:

Private creditors who hold Greek debt that matures in the coming years will "voluntarily" turn in their bonds and accept new ones that mature far in the future. The Institute of International Finance, a banking trade group, said its members had committed to participate in the exchange.

The banks, Germany and France's largest institutions among them, offered to take new 30-year or 15-year Greek bonds. The offer includes a menu of four different flavors of bonds with varying coupons and types of insurance—some would be backed by triple-A-rated collateral. Some of the bonds on the menu include a 20% discount to principal.

The euro-zone leaders said the private sector's "contribution" would amount to €37 billion through 2014 and €106 billion through 2019, though it didn't detail the calculation. They also said a debt buyback program would yield an additional €12.6 billion by taking Greek debt off the markets at discount prices.

That said, is this going to work, or is it pounding more sand down a bottomless rathole?

I vote the latter.

Greece's problems are not just due to Europe's version of financial and housing bubbles. Tax evasion and general corruption have been rampant there for decades. Until there's reform in Athens, all we have here is a larger Band-Aid.

That said, kudos to German Chancellor for making private lenders talking a haircut on stupid loans to a country that was corrupt before it joined the eurozoneand never reformed itself.

But, whither Germany? And Merkel's coalition with Free Democrats? At least one Free Democrat in parliament has called for Greece to be booted from the eurozone. Can her coalition hold? Will a push develop within the EU to force a confidence vote?

And, can the EU hold? Can the eurozone hold? Will German bankers and businesses continue their push to invest further east in Europe rather than to expand their involvement in a morass?