Greek debt restructuring: delay is the deadliest form of denial

The cause was that too much money was lent against assets that could not support that debt ? the asset in this case being the long-run growth potential of the Greek economy. The lending was a mistake, on the part of both lender and borrower, for loan "oft loses both itself and friend", as Polonius reminds us. The solution is to write off a large portion of the debt in return for bringing the government deficit to zero: the lenders will lose some of their money; the borrowers will suffer a recession.

At present, Greece does not pay the market rate on its debt, and does not have to go to market to finance its deficit ? it borrows the money from the other euro member states at a rate far below what the market would charge. Even at that rate, Greek debt explodes unless it can run a government surplus before interest payments of more than 10pc of GDP.

Greece faces the fiscal tightening with nothing to sugar that pill at all. Default or restructuring are officially ruled out, and Greece is part of the single currency (any suggestion of exit is even more emphatically denied). No democratic country either can or should take such bitter medicine. It would kill, not cure, consigning Greece to at least a decade of savage recession. The idea is pure fantasy.

The bail-outs are a palliative ? they address the symptoms but not the cause. But they are also a way of buying time for German and French banks, the primary source of the lending. Foreign banks lent too much to Greece and are sitting on a marked-to-market loss of around 50pc on those loans. But they are in the process of offloading that debt, mainly to the ECB. There is no virtue in excessive lending ? indeed, it was the cause of the financial crisis.

A Greek default would mean the shareholders in the lending banks would lose heavily, and the banks themselves would need to be recapitalised, largely by German and French taxpayers. Our estimates suggest a 70pc loss on their loans to Greece. In effect, that is a fiscal transfer from German and French to Greek taxpayers.

The more quickly they accept that, the better for everyone, and the likelier it becomes that the euro will emerge stronger ? not just a monetary union, but an Economic and Monetary Union, like it says on the tin. Further delay puts at risk both the loan and the friendship ? in the form of the currency union.

Greece could be forced to exit the euro, no matter how stout are current denials.

? Erik Britton, a former Bank of England economist, is a director of Fathom Consulting

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