Why Europe can't let Greek economy crumble: Don Pittis

There are vultures in the financial community snapping their beaks and waiting for a Graccident.

If you haven't heard the term before, Graccident is the latest rhetorical bastardization of the English language after Grexit, wherein you attach the first letters in Greece to something bad.

In this case, Graccident means that despite everyone's best intentions to patch up a solution to the Mediterranean country's economic woes, at some point things will go horribly wrong. The Greek financial house of cards will fall and the country will crash out of the eurozone, sending Greece spinning into bankruptcy and a perilous future. 

• Greece promises bailout deal by Sunday, EU not so sure
• Greece says it has no plans for capital controls as debt crisis deepens
• Greece raids reserves to make IMF debt payment

While Greece's leaders will suffer if the country accidentally collapses, the reputational damage for the European Union will be much worse.

And worst of all, the only ones who will benefit if it happens are those financial vultures betting fortunes on bond spreads and other derivatives that will make them a pile if everything goes sour.

"A precarious situation in Greece is getting worse and the probability of an accident in which governments both in Greece and the rest of Europe lose control is high," said well-known economic commentator Mohamed El-Erian on the business TV network CNBC earlier this month. 

Playing chicken

When two sides in a financial negotiation are playing chicken, there is always a possibility that both will think the other will give way at the last minute. Accidents do happen.

This time, neither side can afford it. 

You can see why the Europeans have been reluctant to cave in. It is a classic case of moral hazard, where, if a person, business or country gets away with something once, there is nothing to stop them from doing the same thing again.

In this case, the idea is that Greeks ran up huge debts. Greeks, through their governments, made deals to borrow even more money to keep their economy afloat. The moral hazard argument would say that if Greeks don't keep to their side of the deal, they should be made to suffer the consequences.

For the EU, the moral hazard case goes far beyond Greece. It is only one of 28 countries in the union. Anything Brussels does for one member country becomes a precedent for what it may be asked to do for other members in the future.

The gloomiest of the Europeans fear a wave of copycat defaults as more countries elect governments to repudiate debts and demand relief. 

Default risk 70%

The financial press has been playing up the technical side of the negotiations, discussing drop dead dates and timelines for IMF payments. One such article on the financial website Zerohedge quotes Deutsche Bank as saying "The Greek Endgame is Here" and that chances of a default are now at 70 per cent.

If European politicians leave people who think like that in charge the chances of a Graccident will become seriously worse.

While legalisms are the tools and pressure points of any negotiation, the real issues go to the heart of European politics and what it means to be a member of a union.

Economically, Greece has lost its way. Austerity has not worked. More austerity will not improve things. Its citizens are outraged.

The Greek economy continues to shrink, money continues to flood out, its banks are in danger of collapse. Piling more debt onto its future bill is absurd. Climbing out from under such a burden is completely unlikely.

Stripping its elderly of their pensions, as one solution required, is un-European. Condemning its children to poverty is worse because it destroys the future. This is not what Europeans want to be seen doing.

When disaster strikes

According to recent statistics from Eurostat, the Greek economy only represents between one and two per cent of Europe's. By the standards of the entire union, its debts are tiny.

From the standpoint of moral hazard, the hardship Greece has seen may be useful. It is hard to see other European countries wanting to go through the same financial wringer.  

When disaster strikes one member of a union, whether it is an earthquake, flood or financial trouble, it is essential for the rest of the members of that union to step forward and nurse the battered one back to health.

In the case of Greece it will not be easy. It is not a short-term project. But if anyone on Earth has the smarts and the wealth to bring the Greek economy back from the brink, it is the Europeans.

The details need to be worked out, the negotiations should be tough. But the European politicians have to clearly state that ultimately they will back Greece.

They must stand on the principle that when member states get into trouble, they will not be sent naked into the desert to live or die alone, and as each one falls, leave the vultures to pick their bones.