ANALYSIS-Reluctant Germany eyes euro zone debt assistance

BERLIN, Feb 23 - Germany will likely step in to help financially weaker euro zone states finance their debt if necessary, swallowing the economic and domestic political cost to head off any potential break-up of the monetary union.

Speculation has grown for the past week that Germany and other European countries may club together and issue a joint bond to aid euro zone states like Ireland and Greece, whose finances have deteriorated sharply during the global crisis.

As the euro zone's benchmark issuer, Germany would see its financing costs rise if it took part in a such a common bond as the yield would offer a premium to German paper to reflect the risk profiles of the other, non-benchmark issuers involved.

The cost of joining such a project would be tough to sell to German voters, and particularly awkward in an election year -- yet Berlin will still probably feel it has to help its weaker euro zone peers with their debt financing in some way.

"I think at the end of the day they will play ball and do what is necessary to keep the monetary union going but I don't think it's just going to be an open cheque from Berlin," said Andrew Bosomworth, a senior portfolio manager at Pimco Europe.

"In my opinion, any provision of finance should be done on conditional terms," he added.

Discussion about the possible issuance of a euro zone bond has swirled against the backdrop of a widening in euro area bond yield spreads -- reflecting a divergence in the financial situation of nations in the 16-nation currency bloc.

Jean-Claude Juncker, who chairs the Eurogroup of euro zone finance ministers, said after a meeting of European leaders on Sunday that he saw no risk of a euro area country defaulting on its debt payments. And yet the issue remains very much alive, partly because Germany is clearly worried.

German Finance Minister Peer Steinbrueck first fed speculation about a euro zone bond, or other financial aid, last Monday by saying all members of the currency area would have to help "if it came to a serious situation" with one member.