Because Greece has been living beyond its means for years, it cannot afford to borrow commercially. Which is why it had to turn to the IMF and the EU for support in the hope that its economy would grow in the longer term. Now it is just weeks away from, again, running out of cash to pay its bills.
But an 'orderly' default looks likely if there is a "no" vote to the EU bail-out. Many Greeks feel the IMF and the EU are simply meting out punishment rather than supporting it. Whether Greece would also have to quit the euro, that's not clear, but very possible; let's go on the basis that it would. So, what to choose?
Why the Greeks should press ejectSuch a move would hand Greeks back the drachma, which would promptly depreciate. Which would, the hope is, stimulate growth and competitiveness. Adoption of the euro certainly did not make Greece competitive in any sense at all.
Why the Greeks should sit tightA Greek default would mean a wholesale overhaul of Greek's financial system - and it would likely be a complete legal minefield, taking decades to sort out. Even the simplest basic loans and mortgages would have to be reorganised, let alone overseas loans.
It would see many Greeks pull their cash out of Greece as quickly as possible (though many sensible Greeks will have already done so). A massive run on the banks, in other words, with everyone trying to avoid holding a (likely) massively devalued drachma. The wealth destruction would be huge.
If default meant ejecting from the euro, it would mean that many of Europe's banks will never be repaid. Which will make the existing credit crisis worse - from loans to mortgages to, very likely, the cost of your insurance policy.
Fear factorFor the British and the rest of Europe, a default would see huge shifts of money moving from the Med to the North, fermenting fear in Portugal, Spain and Italy. It could even induce co-ordinated capital controls. In a sense, some argue, the Greek PM is holding a gun at the rest of Europe. And the markets are terrified: as of this morning, the FTSE 100 is down more than 3% while the German DAX is down more than 5%. In just a few short hours.
So the Greek crisis costs us all, be it for large institutional pension funds and the private investor. Hardly any official information is leaving Athens currently. So there's a massive communication problem too.
Hopeless?No wonder the markets are falling and, in particular, banks. But it's worse for the Germans and the French; their banking operation have more to lose than UK bank. (British investors, note, do have the first £85,000 of their cash protected in the event of a bank or building society collapsing.)
The Germans and French also know that a country defaulting is not like a company defaulting. Much Greek debt was issued under Greek law, not international law. So the Greeks actually may have more power or control over their finances than commonly thought.
Either way, despite the efforts of last year-and-a-half to shore Greece up, a default looks imminent. It's now up to the Greeks themselves to decide, possibly sooner than thought. The Greek government may go at any time now.