It isn’t the consequences for Greece of a Lehman-type ‘credit event’ that worry the central bankers and governments: the risk of ‘contagion’, as they call it, throughout the Eurozone is what preoccupies them. The euro was not designed to default, so when Greece does, other European countries who have had to ask for non-bailout bailouts – Ireland and Portugal – will have their ability to repay their debts questioned. If one or other of them undergoes a ‘rollover’, or ‘restructuring’, or ‘rescheduling’ of its debt – all polite words for default – the next country in line will be Spain, and that is where everything changes. The ECB/EU/IMF ‘troika’ can write a cheque and buy the Greek economy, or the Irish economy or the Portuguese economy. But Spain is the world’s twelfth-largest economy, and the ECB can’t just write a cheque and buy it. A Spanish default would destroy the credibility of the euro, and quite possibly the currency itself, at least in its current form. This is why the current situation has developed, in which governments are reluctant to lend Greece money because they don’t think they’re going to get all of it back, but they’re determined to do so anyway because they need to buy time. The euro was launched with a fundamental democratic deficit, which didn’t trouble the European elite behind it because they had come to believe in a version of manifest destiny.
more from John Lanchester at the LRB here.