Greece: Why the Beast Is Back

It's looking more and more likely that the Greek government will eventually fail to make payments on its bonds on time and in full—in other words, default is looming. Traders put a more than 70 percent probability on a Greek sovereign default some time in the next five years, judging from the prices they're paying for protection in the credit-default swap market. The question of the hour: Should Europe keep fighting to postpone the inevitable or begin arranging for an "orderly" default that causes the least possible collateral damage?

The case for delaying a default is that European banks need more time to repair balance sheets that were devastated by the 2007-09 financial crisis. The profits they're earning now are rebuilding their capital. The longer that Greece can be kept afloat, the better Europe's banks will be able to withstand the losses they'll be forced to recognize if Greece goes under. European banks and the European Central Bank have a strong incentive to extend and pretend.