As anyone with any understanding of financial reality knows, a Greek default is sadly inevitable. This week, that inevitability was underscored by Greece's inability to maintain its budget deficit below the 7.6% it needs to keep receiving money from the Troika.
When the Greek default occurs, the 'beefed up' €440bn European Financial Stability Fund will not prove sufficient to stem contagion to Portugal, Spain, Italy and maybe - ultimately - France. Nor, as Satyajit Das pointed out last week, is leveraging the EFSF a solution: the idea is surreally circular and its assumption
of a mere 20% first position loss is certainly delusional.
So what's the alternative?
It is time to call a spade by its proper name. Some eurozone sovereigns are insolvent and many more chronically illiquid.By virtue of this, so are many eurozone banks. Banks lent to these sovereigns in full knowledge of the credit risk they were taking and they must bear the consequences. Unlike 2008, it may not be possible for governments to bail out all market participants, and weaker banks may well be allowed to fail.
But what does this mean for the employees of a failed bank?
The experience in Iceland may provide some clues. Whilst Iceland was in some respects unique, and at least had its own currency to devalue, the failure of a bank need not be that bad, not for its host country and not for its employees.
In the case of Iceland, for example, three large banks failed in October 2008. From that failure, six banks emerged (one good and one bad for each). Many existing employees who were immediately fired were then promptly re-hired into the new or the old. They had briefly doubled the number of banks in the country, and all had assets to manage. The associated restructuring work has kept the Icelandic banking fraternity in fairly full employment ever since.
Only now, as restructuring work nears completion, are both good and bad banks starting to cut jobs as organisations finally de-lever operationally.
In Iceland, therefore, the pain of job loss for some individual bankers was deferred. The transition wasn't painless: compensation was hammered and bonuses were capped at 25% of salary. However, bankers who thought they were out of a job altogether 3-4 years ago have had time to adjust.
The lessons from Iceland may become very relevant as Greece defaults and European - and possibly even US banks go under. Policy makers will create bad banks in response - they always do. This is, however, the only way that the financial system can be stabilised. When it happens, it will not be that bad for banks' employees and it will, at least, be a chance for the financial system to start again.
The author is a senior financial restructuring professional.