Cut your losses

Greece may soon find itself without a government to face the international fury triggered by the current prime minister’s decision to hold a referendum on austerity. But, whatever happens in Athens now, euro zone governments should brace themselves for a possible Greek exit from the monetary union.

Germany and France, which will be leading the euro zone’s response, may think there’s still a chance to bring Greek leaders to their senses and avoid a bonfire of populism. The only way to do this credibly is to behave as if Greece was already lost.

They can start by suspending the previously-agreed bailouts, including the payment of an euro 8 billion tranche this month: Why keep subsidising a country that could well renege on the economic plans that secured the aid in the first place? This means accepting that Greece may veer into a hard default, and the possibility that it might find itself pushed out of the euro zone.

So, the best way to deal with Greece is to forget about Greece. The governments and the European Central Bank should state they are willing to take losses on their Greek portfolios. And, they should focus on Italy, Spain, and the two countries under a bailout programme, Ireland and Portugal.

First, the euro zone’s bank recapitalisation scheme, set last week at euro 106 billion, will have to be strengthened, possibly up to euro 200 billion, to take into account a Greek default and increased market worries about other sovereign exposures. Second, Ireland and Portugal may need another bailout. Third, Italy should be told in even harsher terms than before the kind of reforms its partners expect — now, not in the indefinite future. This agenda is costly, but do-able.

The time has come for simple but bold decisions. Greece is not crucial to the future of the euro zone. Papandreou’s desperate gambit seems to be as much directed towards his euro partners as towards his internal opposition. “I can always default,” he seems to dare. “Please do,” should be the answer.