I'm having increasing trouble believing any rescue of Greece is possible.
The deepest problem, as I see it, is not German intransigence. It's not the ECB's refusal to play a more active role.
It's that I cannot come up with a good answer to the question: what's in it for Greece?
The austerity measures proposed by Greece's would-be rescuers basically entail shutting Greece out of credit markets for years.
Greece will be expected, in relatively short order, to run primary budget suplusses but will actually run budget deficits because of the level of its debt payments. That is, the Greek government will extract and export Greek wealth and ship it abroad, while cutting government services and spending at home.
Now suppose that Greece just repudiates every single euro of debt it owes to non-Greeks. Its would still be unable to borrow abroad. But it would not lose access to domestic lending sources, the way it does under the austerity proposals. What's more, it would no longer need to make those debt service payments, which would mean domestic government spending would not need to shrink as much.
I wouldn't be surprised if Greece found itself able to borrow earlier post-repudiation than post-rescue. The rescue sees Greece with debt equal to 120 percent of GDP in 2020. After repudiation, the debt levels would be much, much lower, instantly. Greece would have one of the cleanest balance sheets in Europe. Lenders looking to deploy credit would wind up holding their nose and making loans to Greece.
To put it in even simpler terms: if the practical effect of any rescue proposed by Greece is to force Greece to "live within its means," the logical response is to repudiate debt. If you are living within your means, you don't need access to global credit markets.
Still differently: if you owed $40,000 in credit card debt you could no afford to pay, and decided to swear off ever incurring more debt, why not declare bankruptcy? You don't need good credit if you aren't going to use it.
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