When it comes to sovereign default risk, it's all about the percentage of debt held by foreigners. That's because when domestic citizens own their government's debt, it's just a shell game whereby a portion of private wealth has been gobbled up by the public sphere, but the nation's public + private net debt balance is zero. Yet when foreigners hold tons of government debt, then the nation in question is truly 'in debt'.

That's why the Japanese government can manage massive amounts of debt, which is mostly owned by Japanese tax payers, while Greece is screwed, as shown by this Deutsche Bank chart below (Via FTAlphaville):

This is why Europe would probably bail out Greece. Quite a few European banks probably have exposure to Greek debt, which could make for a messy situation Europe would rather avoid. Some speculate that Germany in particular could become Greece's savior, their Abu Dhabi if you will.

Times Online: Would Germany do it? Yes, almost certainly. “In Merkel’s generation,” one German fund manager said, “there is still a sense of responsibility for Europe, and that really drives a lot of her decisions.” But not all agree — Wolfgang Schäuble, the Finance Minister, for one, has said that German taxpayers should not have to foot the bill.

In practice, if Germany did, in effect, guarantee Greek debt, the slight widening of German credit spreads would probably not push up the costs of borrowing to a politically painful point. It would be a tough sell for Merkel at home, but, only a few months after the elections, one she has enough capital to win.