So just let them default!
Most European banks that hold bonds issued by the Greek government should, on paper, be able to cope with the losses resulting from Greece defaulting, and not meeting its obligations to repay these bonds in full. The same probably applies to Ireland and Portugal.
So why not just let them default? The banks would be punished (in a commercial sense) for making ill advised investments, these countries would have the opportunity to begin rebuilding, and huge uncertainty would be removed.
Is that not the route to go, as soon as possible?
Not according to the ECB (European Central Bank) who are driving events. Firstly they are clearly not prepared to allow French and German banks (the biggest holders of Greek debt) to take a hit - their actions, hectoring Greek MPs to vote in favour of the recent austerity plan, made that clear. It is also possible that they believe if they can push the problem of default further into the future, something will turn up, in a Micawberish fashion - perhaps enough growth to increase the tax take, to enable debt to be paid off. This is pure fantasy. Last but not least, there is considerable commitment amongst the political classes, particularly in France, to the euro experiment. And allowing default of any kind would be a slap in the face, and hint at failure.
Once Trichet (ECB head) acknowledges what everyone beyond the ECB knows (Greece, Ireland and Portugal are broke), an orderly default can begin; it won’t be without pain, but it will allow a new, more positive, era to begin. However, as long as he delays, the debts keep growing, the pain increases, voters become more agitated, and more extreme political factions gain ground.
The first programme to bail out Greece was agreed in May 2010, so over a year has been wasted - it can’t continue like this.
(Taken from TopFunds Guide July 2011)