The Greek question has moved on. It is no longer worth worrying whether the country can be rescued from its difficulties in paying what it owes on its enormous, £300bn load of foreign debt. The answer to that question has now arrived. While nothing has been said officially, and pretence is still maintained, it is obvious that Greece cannot honour its obligations and that it isn't any longer disposed to attempt the impossible. The crisis has also answered a second question, which is whether European finance ministers and their leaders can handle full-blown crises. They cannot. Even the International Monetary Fund was moved to observe the other day that the "unproductive" debate on Greek restructuring has to stop. The new question is how to deal with the consequences of both failures.
As far as its debts are concerned, Greece is like a man who has somehow come to owe his creditors £1m but whose annual income is only £30,000. So however hard he works, however many hours of overtime he puts in, however sharply he reduces his daily expenses, even down to the consumption of just one piece of bread and dripping per day and with only water to drink, the task of repaying the £1m is impossible. How Greece's membership of the eurozone, with its cheap money and seemingly inexhaustible supplies of credit, lured the country into a similar situation will be worth telling when the crisis is over.
The impossibility of Greece ever repaying its debts, unlike Ireland and Portugal where coming back into balance remains possible, albeit very difficult, is notable for another reason. For there is a second question to which the country won't give the required answer. "Why," queried the leader of the power workers' union this week, "should the workers pay for austerity measures with salary cuts and job losses? We weren't the ones who enjoyed the excesses that led to Greece's crisis." This question has insistently been asked here, it has been forcefully posed in Ireland and in Portugal, but only in Greece is the government of the day unlikely to get the response it seeks. Indeed if I were a Greek citizen, I wouldn't accept an austerity programme imposed by the EU and the IMF. I would rather the country took its own medicine rather than a cure forced on it by international bodies.
So one day soon, perhaps within the month, perhaps later, Greece will miss an interest payment on its debts. Default would have occurred. Presumably the country would then crash out of the eurozone, re-establish its own currency and suffer a substantial devaluation. That, at least, would make Greece a cheaper tourist destination and give a better prospect to such export industries as it possesses. At the same time, however, Greece's banks, also major holders of government debt, would have to be nationalised. The country would be in a mess, but at least it would be its own mess. Many Latin American countries have been through this long and painful experience and they eventually recovered.
The rest of us, however, would also be in a mess, just as we were when Lehman Brothers collapsed in September 2008 holding some $600bn in assets. That led to one of the sharpest falls in stock market prices that the world has ever recorded. It was only five months later that confidence began to return. The economic dislocation was substantial.
I don't believe, however, that the consequences of a Greek default would be as serious. In the case of Lehman, nobody knew which banks were holding what amounts of dud securities. So suspicion fell upon every institution. There was no presumption of innocence. Banks stopped lending to each other. A credit famine developed.
But in the case of Greece, the holders of Greek debts are well known and clearly identified. The Belgian financial institution, Dexia, is the most exposed, followed by a Portuguese bank and two German units, Commerz and Postbank. Then comes a long list known to everybody. As far as UK banks are concerned, Royal Bank of Scotland, HSBC and Barclays each have minor exposures. We can see exactly who has got the stuff and who hasn't.
There is a further reason to hope a Greek default would be easier to manage. The banks are now better capitalised than they were at the time of the Lehman collapse. Partly this is because they have enjoyed fat lending margins as a result of favourable interest rates; partly it arises from stricter regulation of banks' solvency requirements.
At the same time, consider the mechanism of the existing Greek rescue. European institutions and the IMF have been lending money to Greece so that it can meet its loan commitments. These funds are then immediately transferred to the creditor banks. It's a two-step process. Meanwhile Greek taxpayers are left with the task of repaying the rescue funds in due course. In the case of a Greek default, the same funds could be used to provide direct support for those banks unduly weakened by the loss in value of their Greek bonds. Only this time the funds would never touch Greece.
I'm not trying to minimise the chaos in the financial markets that would follow a Greek default. Although it is known where Greece's bonds are held, financial markets have also been providing credit insurance, which is a much murkier area. Without question, business confidence would be knocked. Without doubt, banks' caution in lending would be reinforced. And for steering financial markets through the crisis, something better would be required than eurozone finance ministers meetings. The G8, which includes the US, Russia, the UK, Canada and Japan as well as Germany, France and Italy, looks the best equipped to provide the necessary leadership. Perhaps there would be no need for a Gordon Brown figure this time, but somebody would have to have a firm grasp of what was required.
Nonetheless, what this analysis tells me is that the inevitable Greek default process should be allowed to take its course. It may be held up for a month or two; more futile meetings of the European finance ministers may take place. But in the end, it cannot be stopped. The sooner we make plans to live with it, the better.
a.whittamsmith@independent.co.uk
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