The Greek crisis is moving toward a climax. The issue is actually quite simple. The Greek government owes a great deal of money to European institutions and the International Monetary Fund. It has accumulated this debt over time, but it has become increasingly difficult for Greece to meet its payments. If Greece doesn't meet these payments, the IMF and European institutions have said they will not extend any more loans to Greece. Greece must make a calculation. If it pays the loans on time and receives additional funding, will it be better off than not paying the loans and being cut off from more?
Obviously, the question is more complex. It is not clear that if the Greeks refuse to pay, they will be cut off from further loans. First, the other side might be bluffing, as it has in the past. Second, if they do pay the next round, and they do get the next tranche of funding, is this simply kicking the can down the road? Does it solve Greece's underlying problem, which is that its debt structure is unsustainable? In a world that contains Argentina and American Airlines, we have learned that bankruptcy and lack of access to credit markets do not necessarily go hand in hand.
To understand what might happen, we need to look at Hungary. Hungary did not join the euro, and its currency, the forint, had declined in value. Mortgages taken out by Hungarians denominated in euros, Swiss francs and yen spiraled in terms of forints, and large numbers of Hungarians faced foreclosure from European banks. In a complex move, the Hungarian government declared that these debts would be repaid in forints. The banks by and large accepted Prime Minister Viktor Orban's terms, and the European Union grumbled but went along. Hungary was not the only country to experience this problem, but its response was the most assertive.
A strategy inspired by Budapest would have the Greeks print drachmas and announce (not offer) that the debt would be repaid in that currency. The euro could still circulate in Greece and be legal tender, but the government would pay its debts in drachmas.
The Deeper Questions
In considering this and other scenarios, the pervading question is whether Greece leaves or stays in the eurozone. But before that, there are still two fundamental questions. First, in or out of the euro, how does Greece pay its debts currently without engendering social chaos? The second and far more important question is how does Greece revive its economy? Lurching from debt payment to debt payment, from German and IMF threats to German and IMF threats is amusing from a distance. It does not, however, address the real issue: Greece, and other countries, cannot exist as normal, coherent states under these circumstances, and in European history, long-term economic dysfunction tends to lead to political extremism and instability. The euro question may be interesting, but the deeper economic question is of profound importance to both the debtor and creditors.
In our time, economic and financial questions tend to become moralistic. On one side, the creditors condemn Greek irresponsibility. The European Union has dropped most pretenses about this being a confrontation between the European Union and Greece. It is increasingly obvious that although the European Union has much at stake, in the long term this is about Germany and Greece, and in the short term it has become about the IMF and Greece. Germany feels that the Greeks are trying to take advantage of its good nature, while the IMF has institutionalized a model in which sacrifice is not only an economic tonic to debtors but also a moral requirement. This is not frivolous on the part of Germany and the IMF. If they give Greece some leeway, other debtors will want the same and more. Giving Greece a break could lead to Italy demanding one, and Italy's break could swamp the system.