Avoidance of a Greek default requires not only a large expansion of the proposed official aid package but also a commitment by the ECB that it will continue to lend to banks against Greek government debt in unlimited size even if other credit agencies follow S&P in downgrading its rating to junk. A run on the Greek banking system is already under way and will accelerate without this commitment.

In an article in Monday's Wall Street Journal, Daniel Gros of the Centre for European Policy Studies suggested that Greece could default without abandoning the euro. Greek banks would lose access to ECB support and the country's status "would resemble that of Montenegro, which adopted the euro as legal tender without officially being a member of the single currency zone". According to Mr. Gros, "the spanner in the works would ... be contagion", with default likely to "trigger speculative attacks on government debt and financial institutions in systematic countries like Spain and Italy".

In reality, any government attempting to default without simultaneously exiting EMU would be unlikely to survive. Greek banks would become insolvent, as Mr. Gros acknowledges, and could not be bailed out by a bankrupt government. Bank depositors would suffer large losses, while credit would freeze. A resulting economic collapse would undermine any post-default fiscal reconstruction plan.

The only viable escape-route would be EMU exit and recreation of a national currency, which the central bank could then print and use to recapitalise the banking system – the policy approach of the UK authorities during the financial crisis. The new currency, of course, would trade at a large discount to the euro but the aim of its creation would be to provide the means to rescue the monetary system rather than boost the economy via an improvement in Greek competitiveness – the initial devaluation benefit would probably dissipate rapidly in rising prices.