Greece just defaulted, but the danger is only beginning

By Matt O’Brien

A woman walks past a slogan in central Athens on January 21, 2015. Whoever wins Greece's general election on January 25, Europe will have to take urgent action to tackle the country's mountain of debt before it buries the rest of the eurozone, analysts say. Alexis Tsipras, head of the far-left Syriza party that leads in the polls, has alarmed EU capitals by pledging to ditch austerity measures and renegotiate the debt left by two huge international bailouts. AFP PHOTO/ LOUISA GOULIAMAKILOUISA GOULIAMAKI/AFP/Getty Images

Graffiti in Athens (AFP/Louisa Gouliamaki)

Greece has just joined Sudan, Somalia, and Zimbabwe in the rogue’s gallery of countries that are in default to the International Monetary Fund. Not only that, but it’s the first rich country to ever do so after it missed its €1.5 billion payment on Tuesday.

As a practical matter, though, this isn’t quite as bad as it sounds. That, more than anything else, tells you how serious the situation is in Greece right now: a debt default isn’t even their biggest problem. So what is? Their banks. And the good news, insofar as there is any, is that this default shouldn’t make things any worse for them. That’s because the credit rating agencies technically won’t even count this as a “default” since it’s not on private investors. That, in turn, means the European Central Bank should still, if it wants, have the wiggle room to consider the Greek government solvent enough to keep guaranteeing the bonds its banks have. Why does that matter? Well, without that guarantee, the banks can’t use those bonds as collateral for ECB-approved emergency loans, and without those emergency loans, they would collapse. So this default shouldn’t make Greece’s financial system disintegrate overnight, which is about all it can ask for at this point.

That’s not to say that there will be no consequences. Just that they’re negligible. Sure, Greece won’t be able to get any more help from the IMF until or unless it pays them back. And this default does give the other euro zone countries the right to call in all the money Greece owes them at once. But Greece needs a bailout from Europe more than …read more