For weeks, the European Union and Greece have discussed a debt deal that would allow Greece to restructure its debt in exchange for multiple interventions in its political structure. But with resistance on all sides, these plans have been shelved for the time being. This is a deliberate dare to the Greek government to meet shock-doctrine demands of austerity, along with a fire sale of public assets. The bond markets aren’t lending and the bailout won’t come without these draconian strings.

Europe’s finance ministers unexpectedly put off approval early Monday of the next installment of aid to debt-laden Greece, delaying the decision until July and demanding that the Greek Parliament first approve spending cuts and financial reforms that include a large-scale privatization program.

After nearly seven hours of talks in Luxembourg, ministers announced a holding action that reflected their struggle over how to avert a potentially disastrous default by Greece. Athens needs the next payout of 12 billion euros from its existing 110 billion euro bailout package by mid-July in order to remain solvent.

The decision adds to pressure on the Greek government and its prime minister, George Papandreou, who on Sunday began urging Parliament to support his reform plans in a confidence vote scheduled for Tuesday night. European markets opened more than 1 percent lower on Monday on word of the delay, and the euro fell against the dollar.

Papandreou has been calling on Parliament to act for a while. But it’s not clear why. The people certainly would rather default. Recent history shows that the country would be better off through default, if we look to the examples of Iceland or Argentina. We also know that austerity in this environment just makes the problem worse. I suspect that the private assets are what the elites really want here.

It’s important to make clear what we’re talking about. Under this deal, Greece would get money from European finance ministers to pay off their debt, which they would then deliver to banks, mostly German banks. If they refuse, German banks would have a problem, and then the German people and other populations in Europe would likely… have to pay off those banks. Perhaps if they stiffened their spine, the banks would have to accept haircuts and write down the debt. In other words, this is a decision over who pays for losses in the system – the Greek people, who have already endured so much, the people of Europe more broadly, or the German banks.

It took a Wall Street Journal op-ed last week, of all things, to explain this properly.

Greeks are starting to question whether there might not be an easier way out of their crisis. And inevitably, Argentina’s experience a decade ago has been attracting plenty of interest.

In the three years leading up to its crisis the Argentine economy struggled, contracting a total of 8.4% by the end of 2001. Strains became so great that the country defaulted on its sovereign debt, causing its economy to slump another 11% in 2002. But the unshackling of its currency from the dollar and subsequent devaluation also reignited growth. Since its 2002 low, Argentine gross domestic product will have expanded by an average annual 7.4% by the end of this year, according to IMF data. Crucially, Argentine output was back above its previous peak within three years of default […]

Barry Eichengreen, an economist at the University of California, Berkeley, famously argued that a euro-zone country couldn’t leave the single currency because to do so would trigger “the mother of all financial crises.” Long before the long political process necessary for any euro-zone country to leave the single currency was concluded, investors would have voted with their wallets. They’d dump the country’s sovereign debt and flee its banks.

But this is pretty much what has already happened to Greece. Two-year Greek debt yields 28% while 10-year bonds are trading at less than half of face value. And for months now, depositors have been pulling funds out of Greek banks. Only the lifeline of yet more EU and IMF loans is keeping Greece in the euro. Loans that will have to be paid back.

If Greeks come to think they’re already near or have reached the worst-case outcome of a euro exit but are getting none of the upside, they may well start to agitate to leave the single currency.

It makes the most sense for Greece. That, of course, doesn’t mean it will happen. But in a choice between mass privatization of state assets and an exit from the euro that at least offers a chance of a soft landing, I’d take the latter.

UPDATE: See Yves Smith’s thoughts.

David Dayen

David Dayen