Stand by them

Greece: Greece is not a near-bankrupt British bank in need of a taxpayers-financed bailout. It's a sovereign country with a government that suffers from a serious credibility problem. But Germany seems ready at last to lend Athens some of its own credibility. This week's European Union summit could mark the beginning of the end of Greece’s harsh financial winter.

Markets responded well to the mere indication that the EU — or to be more precise, the euro zone — is ready to help. The spread on Greek government bonds dropped to 275 basis points on Wednesday, down from almost 400 at the end of January.

There seems to be substance behind the hope. It looks like Germany and France are ready to agree on some kind of guarantee for Greek debt issuance this year. That show of force should convince markets to give the Greek government time to implement its deficit-reduction plan.

A lot of details need to be fine-tuned to ensure the EU actions do not violate any treaties. And a lot will also be expected from the European Central Bank, which could state clearly that it will keep accepting Greek debt as collateral after the end of 2010, whatever the opinion of the rating agencies.

A blanket guarantee for Greece, even one signed by Germany, would not calm markets for long. They need to believe the EU will monitor the progress of George Papandreou, the prime minister, as he tries to turn his plan into policies. Pressure from the European Commission has already led to a tougher approach, including pay cuts for government employees.

The countries that guarantee Greece’s debt do not need to extract a high price - that would only add to Greece’s financial burden.

But they do need to state clearly what would happen if Greece strays from the agreed plan. The simplest answer could be that the guarantee would simply disappear for future bond issues.

Guarantees are not risk-free. The yields on French and German government bonds rose slightly on Wednesday in anticipation. But Paris and Berlin have clearly decided the result is worth the price.