Greek default will happen, the only questions are method and timing

Greece needs debt relief, it has got nothing to do with morality or who deserves what

No one will be surprised if Greek banks fail to open. That will be the start of the financial accident that everyone fears, the consequences of which are impossible to forecast, other than to speculate just how bad they will be. Locked banks and empty ATMs will be a catastrophe. Yet again, banking is at the heart of things.

John Cochrane, a finance professor at Chicago University, points out that if only Europe had properly integrated its banking system, Greece could happily default and no one would really notice. It would be like a small municipality in the US going bust owing money to banks like Chase or Citi: a small problem for the shareholders of those banks but not an issue for the Federal authorities.

The point is that in a single currency area, you need banks that operate all over that geography. Instead, we have relatively tiny local (country) banks that have exposures that are too concentrated.

In the US, small regional banks exist but they don’t matter. The big boys dominate and when small fry go broke, the system copes. (Of course, when big and small go bust together, that’s a different matter, a systemic rather than trivial affair.)

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Greece should be a similarly small problem, one that doesn’t matter, at least systemically.

Imagine what would happen to Irish banks and our external borrowings if the domestic property market took another tumble. If, instead, a small number of mega pan-European banks dominated the mortgage market, it would be a minor incident.

One aspect of the Greek bailout that resembles Ireland’s is the way in which foreign banks and private investors have been bailed out by taxpayers.

When (not if) it is acknowledged that the dodgy loans made by Greek banks will never be repaid, the European taxpayer will be on the hook via the ECB. Even that shouldn’t be a big deal.

Estimates vary but it looks like the ECB has lent the Greek banking system about €120 billion. Perhaps as much as half of this is now cash buried somewhere or sitting in foreign bank accounts. That’s a bank jog (which may soon break into a run). For a banking system as big as the euro’s should be, these are trivial amounts.

If the Greek banks didn’t exist – imagine those pan-European banks again – Greece defaulting on some of its debts would be a footnote to the accounts.

Instead, the Greek banks, already highly illiquid, are in danger of tipping over into insolvency, taking the ECBs reputation – and a small chunk of its balance sheet – with it.

It is hard to imagine how all of this could have been handled any worse. Even if there is another last-minute deal, we will soon be going through all of this again. Imaginative schemes – all ignored – have been proposed by some smart people that offer ways for the Greeks to default and stay in the euro.

These are the only plans that offer any kind of solution.

Greece needs debt relief. It has got nothing to do with morality or who deserves what; debt relief is the only way to end this. All other efforts are politically driven expedients to stave off, for as long as possible, no matter what the cost to the Greek economy and its citizens, an inevitable debt default.

Europe has a new rule: no official debt relief for anyone, ever. It is as daft as it is damaging. Previously, the Greeks got away with a partial default but it was too small and, it seems, cannot be allowed to happen again. None of this makes any sense.

Default is going to happen – the only questions are around method and timing. It suits pedlars of moral fairy tales and politicians pandering to local audiences to choose financial chaos over sensible strategic decisions.

European institutions are not known for their decisiveness, but they used to respond, finally, to a crisis, sometimes even with a good decision.

Today, Europe’s leaders resemble the collection of Irish politicians and officials who gathered on that fateful night of the bank guarantee. Out of their depth and hoist by past procrastination and bad decisions. I think we have seen this movie before. Somebody needs to rethink what the euro is for and explain it to us.