The real reason why Greece and the other PIGS have been, and will continue to be bailed out, is that the European banks have huge exposure to the debts of these countries.
European banks currently own 42% of Greek debts while foreign governments own 26%, the rest is owed domestically. A default today would lead to major losses for European banks as well as causing a significant contagion both via the credit default swaps (CDS) market and via the money market funds, especially those in the US which have huge exposure to the European periphery.
“It would be a mistake to think that the bailout is actually a bailout of Greece. Greece is a write-off. You can’t have the kind of debts Greece has with olive oil income – they have no industries to speak off, they have shipping but the shipping industry doesn’t pay taxes in Greece… the bailout is actually a bailout of the ECB itself and the banks in Europe.” Dr. Marc Faber – 10 May 2011
The bailouts give these banks more time to divest themselves of the bad debt. By 2014 for example, European banks will own just 12% while foreign governments will own 64% of Greek debt. So by delaying the inevitable the banks will have managed to transfer the bulk of their losses onto European taxpayers. In the meantime the nation’s outstanding debt will have risen from €340 billion to around €400 billion.
In essence then, what were “bank bailouts”, have been rebranded “sovereign debt bailouts” to make them more palatable or taxpayers.