How This Greek Tragedy Will End

Article excerpt

Byline: Rosemary Righter; Righter is associate editor at The Times of London.

Default may be inevitable--and costly. Here's what the world should brace for.

It's time to stop kidding ourselves about Greece. On the third anniversary of the Lehman Brothers collapse, the heavy brigade--the Federal Reserve, European Central Bank, Bank of England, and Japanese and Swiss central banks--moved decisively on Sept. 15 to avert a liquidity crisis in European banks that, as Greece heads for Hades, has found American investors understandably leery about lending greenbacks to banks with hefty portfolios of Greece's worthless bonds. Between now and Christmas, the big five will hold joint auctions, providing unlimited quantities of dollars.

Coming in the wake of collapsing EU bank stocks and a Moody's downgrade of two of France's biggest banks, this display of firepower was a stout, badly needed riposte to the feckless Micawberism in euro-zone capitals. The central banks are arming the financial world against the Greek default that everyone (other than, to judge by their public statements, Angela Merkel, Nicolas Sarkozy, and George Papandreou) now expects.

Over the past 18 months, the fiction that chronically dysfunctional, spendthrift Greece could, even with massive handouts, reform its way back to economic health has cost Europe's taxpayers billions. The money would have been better spent offsetting the costs of writing down the unpayable debts of a country of little importance. Worse still, the political pussyfooting over Greece has also cost governments vital credibility at home and abroad and magnified the risks to the euro that they sought to avoid.

If the idea was that pouring money into Greece would divert attention from Portugal, Spain, or Italy, the strategy backfired: financial markets reasoned that if politicians lacked the courage to face the facts in Greece, what confidence could there be that peer pressure would compel Italy or Spain to put their appalling finances in order, starting with demolishing their extravagant publicly funded networks of political patronage? The more Merkel and Sarkozy insist that Greece's future lies squarely within the euro zone, the more they put the euro at risk. …