Greece is the word

Such a lot of money, placed by so many investors, rules the currency markets that movement in currencies is usually nuanced. When you hear ‘sterling fell badly’ it means it has fallen from 1.12 to 1.1, not from 1.12 to 0.6. It is, although few people seem to realise it, a great benefit of what they label ‘speculation’.

Occasionally, however, there are serious movements and these tend to be when the markets have lacked information or been misled. Such an occasion is happening with the euro. There is a tacit deal at the moment that no country will be allowed to default – by which investors mean they will not lose any money. This means bail-outs, and as long as they go on investors are happy to buy, say, Spanish debt at 2% more than Germany is paying, on the grounds that it is extra interest for the same risk (Germany).

The markets seem to have had almost unlimited confidence that this system will persist (I must say I don’t) but are beginning to be wary that its days are numbered. What we assume to be the Euro-Group’s final position is that Greece must agree to make cutbacks and must denationalise industry before the next tranche of money is made available. There is currently a debate in the Greek parliament over whether to do this and the outcome is far from certain.

Daniel Hannan, the MEP make a good point in yesterday’s Telegraph. When, in Dr. Zhivago, the good doctor is asked why the Bolsheviks had to kill the Royal Family, he replies ‘It is to show there is no going back’. This is how it is for the euro. The Euro-group feel that if one country leaves the currency system the markets will think that another, then another can. In this, I think, they are correct.

The position for the Greeks is that they feel they are being led along. They know that if they leave the euro there will be a massive devaluation – as much as 40% - and traditionally this means that the people suffer: imported goods are much more expensive, as is the servicing of their debt, which would still be denominated in hard currency. Thus an external devaluation means an internal devaluation anyway: as the currency falls the people get poorer.

But the equation is different if they default: they simply renege on a chunk of their debt, or take an interest holiday, or extend the maturities so that there isn’t much to pay right now. This constitutes an external devaluation resulting in not nearly so much of an internal one: something the rioting unemployed will appreciate.

And in this Greece has a role model: Iceland, which allowed its banks to go bust, a technical default which seems to have done them little harm.

And the Greeks know, deep down, that the whole thing is unsustainable. Their productivity is so low that the same crisis will occur year after year. As a well informed Italian once said to me, there comes a time when you just accept you are in the second division. It may well be the Greeks would be happier with that acceptance, or it may well be the charade will continue.

If Greece leaves the euro, the governments of the big countries will still be spending, this time to shore up their own banks which have lent so much money to Greece. But that may be preferable to these continuous bailouts.