Quotes of the Day

After the Greek parliament on Sunday passed yet another package of austerity measures demanded by its euro-zone neighbors — this one worth $4.4 billion — the path seemed clear to finalizing a long-delayed, second bailout of the country totaling $170 billion. Well, it turns out the Greek vote wasn't enough to satisfy skeptical euro-zone leaders. Instead of pinning down the bailout details, European finance ministries have reopened the entire plan to bail out Greece. A debate is now raging among euro-zone countries over whether or not a second bailout makes any sense at all. The basic problem apparently is that there is a growing belief in some northern euro members — such as Germany and Finland — that Greece's politicians will never be capable of implementing reforms, whatever promises are made now, so a new bailout would end up being a waste of money. German Finance Minister Wolfgang Schäuble publicly questioned the commitment of Greece's politicians to reform after an upcoming election.

When this latest twist in the debt crisis will resolve itself is unclear. Greek politicians are scrambling to find yet more budget cuts to appease their euro-zone partners. Jean-Claude Juncker, the prime minister of Luxembourg, said that a resolution will come in a meeting of finance ministers on Monday. But there is talk that a final decision on the bailout may not be taken until early March, maybe even later, or that the bailout might be split up into parts, with some facing postponements. The doubts and disagreements have exposed the widening divisions and distrust the ongoing debt crisis is cracking open in the monetary union. On Wednesday, Greek President Karolos Papoulias lashed out at Greece's critics in Germany and elsewhere. "We are all obliged to work hard to get through this crisis, but we cannot accept insults from Mr. Schäuble," the president blasted. "Who is Mr. Schäuble to insult Greece? Who are these Dutchmen, who are these Finns? We have always defended not only the freedom of our own country, but the freedom of Europe."

Hey, wasn't the euro supposed to be an instrument for peace and democracy? I guess that's not the case when $170 billion is on the table. The possibility that Greece may not get its bailout changes the outlook for the euro zone dramatically. Without that rescue money, Greece would almost certainly default, probably in March. And what would the consequences be? There's a not-so-bad scenario, a bad scenario and an absolutely catastrophic scenario.

First, the not-so-bad outcome: Greeks would suffer terribly, but damage to the rest of the euro zone would be limited. Many of us have been questioning the wisdom of a second bailout of Greece for a while. Europe's leaders are really just playing catch-up on this idea. The thinking has been that Greece needs a full-on reboot of its economy, not more bailout loans. Another rescue wouldn't bring Greece's debt down to sustainable levels anyway, and its calculations are based on unrealistic assumptions about the Greek government's ability to deliver on reforms and privatization. The euro-zone arrangement for a second bailout plus moderate debt reduction would only saddle the country with debts it couldn't pay and trap its people in a depressed economy for a very long period of time. In other words, a bailout may not actually succeed in fixing Greece. Since the economy is in worse shape now than it was when it received its first bailout in 2010 — with a sharply contracting GDP, a higher debt-to-GDP ratio, and massive social upheaval — in some ways a second bailout appears to make less sense than ever. Better to just let Greece default, forcing a true restructuring of its debt.

The main impetus for a second bailout has been fears of the contagion effect a disorderly Greek default would have on the monetary union. But it appears that some in European government circles believe that those fears are overblown. The impact of a Greek default could be contained, the thinking goes. Financial markets are already acting on the assumption that Greece will default, so there is no surprise value. The current structure of the second bailout includes a default in all but name, just an organized one — the restructuring of $265 million of Greek sovereign debt. Private bondholders will already take a 50% haircut on Greek bonds in that restructuring, so there's no way of avoiding losses at big European banks even if a second bailout goes ahead. Of course, a Greek default would be disastrous for Greece. It would destroy the Greek banking sector, cut Greece off from new funding and force a drastic reduction in the size of the Greek budget. But all that will have to happen anyway, even with a bailout. In other words, if the pain can be contained to Greece, why not just let Greece go and start over?

I see the logic behind this thinking. But we also have to question if it is possible for Greece to remain in the monetary union without a bailout. So that takes us to the bad scenario: a Greek default forces the country out of the euro zone.

Here's how that would play out: A Greek default cuts the country off from access to any new funds, but Athens requires financing from outside the country to keep the government running. That raises the specter of a government that can't pay salaries or run state services (though it is possible that policymakers could redirect money that would have gone to servicing its debt into paying its bills). The default also wipes out the entire Greek banking sector, which is holding large amounts of government bonds, but there is no money around to recapitalize them. Even worse, Greeks of all types, upon hearing news of a failed bailout, would empty their bank accounts and send their money out of the country. They would quickly realize that the looming default could mean an exit from the euro zone, and when the drachma returned, it would do so at a depressed value, wiping out a hefty chunk of their euro savings. So Greece experiences a total meltdown of its financial sector. The only solution for Greece is printing money to fill in all of the holes, but since the country is a member of the euro zone, it can't print euros. That forces Greece to withdraw from the euro zone and return to its original currency, the drachma. The hope in Europe would then be that the chaos would stop there — that the combination of the euro-zone bailout fund and commitments to the rest of its members would prevent any other countries from leaving the zone. So you'd have major turmoil in financial markets, but the euro zone would hold together, minus Greece.

That's not impossible. But at the same time, there is a chance that Europe's leaders could miscalculate the impact a Greek default would have on sentiment in financial markets, and the possible degree of contagion that would result. European politicians have consistently misjudged the market reaction to their decisions in fighting the crisis. That takes us to the really catastrophic scenario — an unraveling of the entire euro zone. It goes something like this: Let's try to imagine what would happen in other, troubled, euro-zone countries if Greece defaulted. For example, Portugal. Investors have come to worry that Portugal, like Greece, will require a second bailout. The Portuguese, watching events unfold in Greece, could very well lose faith in their own economy, as well. So the Portuguese head down to their local bank branches and empty their bank accounts of euros just like the Greeks, and ship them out of the country. Compounding matters, foreign investors, fearing a Portuguese default similar to the Greek one, dump their holdings of Portuguese debt on a massive scale, sending borrowing costs soaring. That means the euro zone would have to rush aid to Portugal to save it, too, from being forced out of the monetary union. And then what happens to Spain, or Italy? Oh the humanity!

How likely is this worst-case scenario? I'm not going to give odds here. The fact is the fallout from a Greek default is impossible to predict. That's why in the end, if I had to make a bet, I'd say the Greeks will get their bailout. The nightmare possibilities are simply too great for the rest of Europe to dismiss. But to warn you, I'm not a betting man.

• Michael Schuman
• It turns out the Greek vote wasn't enough to satisfy skeptical euro-zone leaders