In for a Dime, in for a Trillion

A thought occurred to me as I was reading a couple of articles about the European debt crisis yesterday. Right now, the European Central Bank (ECB) is printing money and loaning it to Greece and Ireland (soon to include Portugal and Spain) because these countries can't pay their bills without access to more loans. The ECB is holding interest rates low to make it easier on these borrowers, but the money is still borrowed and that debt still has to be serviced. What happens when (not if) they discover that, say, Portugal is insolvent?

Once you've printed the money and loaned it out, it's too late to get it back. Unlike loans from German and French banks, no one is going to immediately go under if the loans are simply forgiven and the money is effectively gifted to Portugal. If you aren't going to draw the line now and force bankruptcies and liquidations, what would make you do it a year from now when you've got so much more invested? Once you start down the road of printing money to cover government debts, where do you stop, particularly if the government you're lending to has no hope of ever paying it back?

This is the point Marc Faber has been making for quite some time - these nations are insolvent and will never be able to pay back these loans. The money quote starts at 0:30.

So once the ECB has bought up the debt and the commercial banks in Germany have quietly sold theirs off to the ECB, the only one taking the hit when you finally forgive the debts of Portugal or Greece will be people holding Euros and that will happen through inflation. Inflation is relatively indirect and politicians can point fingers at each other about it while the banks and investors get out from under the loans they made to insolvent countries.

This is a long way of asking, "What's the real problem here?" Is there a real debt contagion risk? Does anyone think that the ECB or Fed, once having printed tons of money to loan to governments is ever going to grow a backbone and demand a liquidation once it becomes obvious the debts will never be repaid? Or will they instead, just forgive the debts and wash away the problem in a cataract of printed Euros and Dollars?