The same game of moral hazard versus systemic risk that was being played out with banks is now being played out with sovereigns. Senior European figures have engaged in 'constructive ambiguity' towards Greece - telling it to put its house in order but staying oblique as to whether the EU will step in to save the country from default. A similar state of confusion existed between Abu Dhabi and Dubai until the United Arab Emirates capital extended a $10bn bail-out to the troubled emirate.
The reality is different. European leaders know perfectly well that they cannot under any circumstances let Greece go down, even though such an eventuality at present does not look likely. The failure of a eurozone member would send shockwaves around the rest of the eurozone that could lead to crisis in several countries.
That said, governments need to take decisive measures on restructuring and cutting back on expenditure. So far both Greece and Dubai have gone about this is in ways that have unsettled markets and failed to get to the nub of the problem.
Greece's new prime minister, George Papandreou, is in a difficult bind having fought an election on promises of wage increases for public sector employees. He now needs to do the opposite if he is to bring a ballooning 12.7% deficit, and debt to gross domestic product ratio heading for 135% by 2011, under control.
The Irish approach of cutting wages and unemployment benefits is the only credible one and will probably gear it up for a faster rebound. Greece, with its hardline trade union movement, will suffer longer if it staves off the inevitable.
Greece, at least, does have an efficient debt management agency, the PDMA, to ensure it gets funds at the best price. The same market savvy cannot be attributed to Dubai's decision in November to announce a debt standstill at government-holding company Dubai World on the eve of the Eid holidays. Markets hate uncertainty and this sent them into a tailspin - even though it always seemed likely that Abu Dhabi would step in.
Long term, the trend towards states having fiscal responsibility laws or codes that prevent governments from getting themselves overspent or overlevered in the good times, would seem to be the way out.
