Imagine a homicidal maniac who points a weapon at his neighbor’s house and dares the police not to shoot him. Now imagine a tiny country taking the same approach with an entire continent. Greece is giving its friends in the eurozone exactly three months to give it more bailout money or it will abandon the euro. Perhaps the neighborhood maniac analogy is overdrawn. After all, the worst that could happen to Greece is immediate forced austerity and a return to a currency with far less buying power, plus a lockout from the international bond market lasting for several years. The damage to the eurozone would be far greater.
Greece’s prospective departure from the eurozone would break a taboo against leaving the currency union. Larger European economies would follow suit in short order; Italy and Spain are the next leading candidates to return to their native currencies. The more important result is the immediate 50-70% debt writeoff that Greece’s creditors would be forced to swallow. European banks could no longer kick the can down the road for months on end in the hope that indefinite bailouts will continue. The daisy chain from a Greek default, to European bank defaults, to insolvency at American banks holding European bank debt, to a failed U.S. Treasury bond auction from capital-starved American banks would be swift.
This announcement from Greece marks the first hard deadline set by the only party that really matters – the one with its finger on a debt trigger. The trigger-puller has a target rich environment with U.S. high-yield bonds already expected to see a rise in defaults even when interest rates remain at record lows. The technocrats running Greece are not couching their threat in language designed to placate local politics. They are fulfilling their Eurocentric mandate by speaking truth to power in Brussels.