European politicians always wanted Greece to get a lot of solidarity, in terms of taxpayer euros -- they are very sensitive to Europe and the Euro looking bad. Problem was that the taxpayers in countries that didn't forge their accounts, didn't lie to the EU, and didn't borrow 13% of the GDP weren't thrilled to pay up. How do you explain to Irish civil servants whose wages have just been cut that they will have to cough up for the third world-levels of corruption and sheer unwillingness to pay taxes in Greece? Compared to that, loan guarantees via a state-owned bank look much better. There is no immediate transfer of resources, the whole thing is mildly complicated, and it can be done with an "alliance of the willing", instead of the EU as a whole. Of course, the result is exactly the same as if the taxpayers just sent a cheque to Athens -- the weaker (Mediterranean) members of the Euro now know that they can rely on the rest to help them out, Greece will use every excuse not to raise taxes and cut spending, and the cost is born fully by taxpayers in the countries with responsible policies. For those who read German, Harald Uhlig has a clever post on why none of the standard economic reasons for helping Greece hold much water over at Handelsblatt.
Personally, I think that White House head of staff Emanuel has it right. He said that "You never want a serious crisis to go waste." By not helping Greece, even at the cost of a messy default and exit from the Eurozone, the EU would make it clear to the other member states that they have to clean up their act. In particular, given that the EU is the wrong currency for Portugal and Spain as they are now, it would produce the pressure to reform labor markets and regulation so that competitiveness can be regained. Since devaluations are ruled out, it's the only way to go. If, on the other hand, France and Germany pay in the end for Greece's foibles, with a detour via KFW-Bank, I think the (already remote) chances of the right thing being done here instead go to zero. Before anything happens, we'll have to see if opponents see through the "it's only a loan guarantee" shenanigans.