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Concerns grow that Greece debt crisis could overstress European Bank

The Greece debt crisis, which is still subject to German parliamentary approval and may be challenged in court, is putting unsustainable stress on the European Central Bank, some analysts say.

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Germany, which has dragged its feet over a bailout since the depth of Greece’s problems emerged earlier this year, seemed to finally acquiesce Wednesday, though holdouts remained in parliament.

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Chancellor Angela Merkel, joined by European Central Bank chief Jean-Claude Trichet and International Monetary Fund Managing Director Dominique Strauss-Kahn who both made a special trip to Berlin to raise support for a bailout, said Thursday that a bankrupt Greece would sink the value of the euro and that Germany, expected to make the largest contribution to the bailout package, would act to protect its currency. Mrs. Merkel’s comments were also meant to stop the market panic about contagion risk the Greek crisis would spread across Europe.

$160 billion needed

She spoke of a $60 billion aid bill, although financial analysts now estimate that Greece needs $160 billion over the next three years to remain solvent.

"The package European leaders are discussing right now is only the beginning,” says David R. Cameron, professor of political science at Yale University and director of the Yale Program in European Union Studies.

Some investors and economists suggest that Greece might do well to merely default or restructure its debt and thereby avoid taking on more debt just to pay off its current loans. This would have dire consequences for the ECB and private European banks as the largest holders of Greek debt. According to estimates from Barclays Capital, German banks hold $37 billion in Greek bonds. Without a bailout, those bonds would pay pennies on the dollar, causing tens of billions of dollars in losses for any institution that holds them.

“Germany had to give in to [the bailout] not only because of their own interests in protecting the euro, but because of private German interests as well,” says Ansgar Belke, macroeconomics research director at the German Institute for Economic Research in Berlin. “This bailout will happen if only because [Berlin needs] to protect the banks.”

Greece must increase cuts

As a condition of any bailout, the IMF has asked Greece to increase taxes and cut spending, including by eliminating two months of bonus pay for public workers.

Recent strikes by public workers over pay cuts, as well as a history of government corruption and fiscal irresponsibility, have left investors with little confidence that Greece will follow through on its pledges. But Lachman says that Greece is no longer in the driver's seat when it comes to its own fiscal policy.

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