GREEK CRISIS RISKS BOILING OVER / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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MARCH 23, 2010, 3:23 P.M. ET.

Greek Crisis Risks Boiling Over .

By RICHARD BARLEY

The Greek crisis has reached a new level. What started as a problem with the fiscal credibility of one euro-zone state has now exposed political fault lines running through the whole currency bloc.

Constructive ambiguity, whereby markets were placated with the belief unspecified help could be provided to Greece, has given way to confusion. That increases the chance European leaders will be forced—in some cases very much against their will—to provide more concrete help.

One measure of the seriousness of the crisis can be found in bond yields: less in Greek bonds—although the 10-year yield climbed to close to 6.5% on Tuesday—and more in German Bunds, which at 3.06% are at their lowest yields in about a year and close to the low of 2.9% hit in the depths of the financial crisis. This reflects three forces at work: the flight-to-safety trade, a preference for German fiscal prudence, and fears over the potential damage the Greek crisis could inflict on the euro-zone economy and financial system.

Another measure is the response of European Central Bank President Jean-Claude Trichet, who has noticeably softened the ECB's hard line on Greece and switched to playing peacemaker as political divisions have threatened to become entrenched. On Tuesday, he said Greece could receive loans from other governments if the euro-zone was threatened and suggested the ECB might yet reconsider its collateral rules to allow Greek government debt to remain eligible beyond the end of this year if further ratings downgrades occur. Meanwhile, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, warned the Greek crisis could directly affect the U.S. economy, including via a broad shock to financial markets that could affect the banking system or lead investors to retreat from sovereign debt.

The market is on red alert ahead of the European Union summit at the end of this week. Greece is continuing to demand further support while insisting it hasn't asked for aid. What needs to happen is clear: All sides need to cool the debate and—as Mr. Trichet has pleaded—think carefully before opening their mouths. The only real solution is for politicians to focus on the hard decisions needed in all countries to repair the damage caused by the financial crisis and to create conditions for future growth.

But the chances of this happening are growing slimmer. Greece's attempts to coerce its European partners may yet pay off in the form of some kind of support, with the latest focus on some kind of joint euro-zone and International Monetary Fund package, in exchange for tougher rules on fiscal profligacy in the future. But short-term fixes may lead to problematic outcomes, not least the message sent to other highly indebted countries. And it will do little to dispel the doubts that have been raised about the functioning of the euro zone and its ability to enforce discipline on wayward states.

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