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Pisani: Greece Bailout is Good & Bad News (UPDATED)

Updated: Reality check: stocks drop as German spokesman tells Reuters that reports on aid for Greece are "unfounded."

Don't even ask what I think of 2013: separately, the Hermes CEO says 2011 and 2012 "look very gloomy."

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Stocks have rallied in the late morning on a Reuters headline, "Eurozone governments have decided in principle to help Greece."

This is good news, and bad news. Good news for Greece because they will likely get cheap loans (like 4 percent) to tide them over.

The bad news is, it doesn't address the structural problems, which can only be solved through a domestic reform process.

There has been a lot of interest in the Treaty on European Union recently. Some have argued that a direct bailout — where the government would simply give money to Greece, or assume Greek liabilities — would violate Article 125, paragraph 1 of the Treaty:

"The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project."

That seems pretty clear: neither the Community, nor a Member State, will be liable or assume the commitments of central governments.

This was done to prevent the idea that one country will be held liable for the debt of another, and prevent eurozone wide debt issuance.

Here's the catch: the Treaty has a loophole. It is Article 122, paragraph 2.

"Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the Member State concerned."

This would allow for a loan, and it is this paragraph upon which assistance — whether unilateral (with Germany) or multilateral — will be based. Just don’t expect anyone to take on the liabilities of previous Greek debt.

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