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This was predictable. Berlin (if not the Bundesbank) and Paris have aligned themselves with the European Central Bank's preparations to intervene in government bond markets and are well advised to see how that plays out before their next move. Offering Athens anything before the creditor troika finishes its assessment this autumn is politically impossible at home and tactically unwise vis a vis Mr Samaras's government. If Athens shows it means business, however, the extension should be granted but with no extra funding.

As the wheels of diplomacy whir on, the cogs of the Greek economy are grinding out a new reality. Austerity and a European slowdown have depressed the economy and kept pushing headline deficit goals out of reach. But Athens has done more than many think. Unit labour costs are falling and the primary deficit – before debt service costs – is almost gone.

The politics of the rescue will change markedly if Athens reaches primary balance soon. It will not need help to pay wages and pensions; rescue money will only fund payments to creditors. A funding cut-off would be less devastating than earlier. It would lead to a forced restructuring, to be sure, but would be less traumatising than with a big funding gap.

Crucially, default need not lead to an exit from the euro . Once the ongoing recapitalisation of Greek banks is complete, and especially if the eurozone makes headway on banking union, there will be nothing for Athens to gain from an exit even in case of default.

While the private sector would face a difficult adjustment, a realistic worst case could be a situation like Montenegro's, where the economy operates entirely in euros though it is not a eurozone member. That would be humiliating enough, and Greece should aim for better. But a new drachma may be less likely than markets think.

Source: Financial Times