“Had Greece been a country with its own currency, such as the Czech Republic or New Zealand, the central bank could have plugged the funding gap and prevented an abrupt collapse in spending. Membership in the euro area removed that option. The government and the banks owed debt in a currency the Bank of Greece could not print, and the European Central Bank was not keen on helping.
The textbook response would have been for the government to default on its debt and get a loan from the International Monetary Fund to help smooth out the adjustment. The amount of money required to buy time after a restructuring would not have been large compared with the nearly €300 billion that ended up being lent.
That option was blocked, however, by a coalition of Greece’s ‘European partners’ and the U.S. They were still traumatized by the bankruptcy of Lehman Brothers and had come to believe that its default had made the financial crisis far worse than it otherwise would have been. The result was a firm commitment to avoid any reduction in what the Greek government owed.
Their concern was not about what a default would do to Greece, but about what it would do to them. […]
There was no political will in 2010 to spend hundreds of billions of euros to bail out Dutch, French, and German banks. To Greece’s eternal misfortune, however, there was enough ‘solidarity’ to launder that Northern European bank bailout through the Greek government.”