The debate over how to divide the costs of rescuing Greece is one of the central questions European officials hope to resolve at a weekend summit that comes almost two years to the day after a newly elected government in Athens admitted that the country’s finances were “off the rails.”
……On Wednesday evening, an unexpected gathering of top European officials and IMF Managing Director Christine Lagarde in Frankfurt failed to bridge a divide between Germany, which is footing much of Greek’s bill and supports larger private-sector losses, and France, which is more concerned about the impact of greater losses on its banks.
via Greece: Banks and Pols at Impasse.
My money is on Germany — and a bigger haircut for banks. Then the next headache is how to recapitalize the banks. The cause of the problem: Basel II allowed 50:1 leverage on government (including Greek) bonds.