There is the old saw about when you borrow money from a bank, paying interest and repaying the loans are your problem. But when you are unable to meet the terms of the loan it becomes the banks problem. If the bank had been more risk averse or done its sums better it would not have loaned as much and you might not have gone broke.
Greek debt, it now appears, is becoming less of a problem for the Greeks and much more of a problem for the IMF and the European governments (rather the European tax payers) via the ECB, the European Investment Bank and the European Financial Stability Mechanism, who have backed the Greek governments (that is Greek taxpayers) with over €300bn of credit repayable over the next 30 and more years, with about €25bn due this year. Both the Greeks and the lenders involved must be well aware of the problem that the banks have. Almost all of the outstanding Greek debt is now owed to governments and their agencies (that is their taxpayers) after successive bail outs that avoided default and converted private into publicly owned debt.
The problem for the lenders is how much of the debt that they can realistically hope to collect, were the Greeks to declare default. In other words, how many cents on the euro could they still hope to collect in the bankruptcy proceedings that must follow? Unless the Greek government is willing to isolate Greece not only from the European Monetary System but from international trade and finance, they will still have to come to formal terms with their creditors. In such negotiations that will follow, the creditors would still have to be realistic about the demands they could make on the Greek people and their representatives in current and future governments.
The costs of having to leave the euro and the European Union (EU) are bargaining chips to encourage the Greek government to spend less on their many supplicants and grow faster through growth encouraging reforms. This would mean more competition in Greece and could enable the creditors to collect more of the funds they supplied to Greek governments so negligently in the past. Throwing more good money after what is now obviously bad, has less appeal for the creditor governments than it did – given the unwillingness of the Greek government to do or even to be seen to do what is asked of them. But the opportunity to make as much of your debt problems the problem of your bankers, as the Greeks have attempted to do, may still prove to have been a useful strategy – if Greece comes to better terms and retains its status in Europe.
Opportunity for the Greek economy with a Greek exit (Grexit) may come in the form of a weak drachma. But any gain in competitiveness through a weaker exchange rate is surely likely to be quickly eroded by higher inflation. Not facing up to economic realities (without access to foreign or domestic credit) will surely mean money creation and inflation to come. Not reforming a pension system that so encourages early retirement will remain a drag on economic growth, as will retaining so many of the policies that have bankrupted Greece. Greece, given the apparent appeal of its leftist leaders, could well become the Venezuela of Europe should it exit the EU. If this happens, it may take a long period of time and persistent economic failures for economic realities to reestablish themselves in the Greek imagination: you cannot spend as a nation much more than you produce, unless you can persuade others to lend to you. The likelihood of such persuasion succeeding any time soon, in the absence of some kind of deal with the EU, seems remote.
European bond markets can clearly withstand a Grexit from the euro. ECB support for the bonds issued by Spain, Portugal and Italy has eliminated contagion from a Greek default. The state of the markets in other euro government bonds tells us as much. Yet there is still much to lose for Europe – the banks will still be left with the problem of what to do with Greek debt even should Greece have been punished with expulsion from the EU. Formally writing off much of the Greek debt, as will have to be done should Greece default, will not be a comfortable exercise. So, given the alternatives for both creditors and debtors, a deal might yet be struck. This would be a deal that allows the creditors to postpone for now any formal recognition of how much they have lost, while allowing the Greek government to claim a much better deal than offered earlier, including access to further financial support, with a frank recognition that the debt cannot ever be fully repaid, even under the most conceivably favourable assumptions about the Greek economy.