Greece and the European Union could face a showdown in their debt talks as early as this week. And if you had to place odds right now, the likelihood is that the stubbornness of Europe's senior leaders will create a catastrophe for both Greece and the EU.
Here is the state of play. The new Greek leaders, Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, spent most of the past two weeks making the case for relaxed terms. They hit a stone wall.
Under the current agreement, EU financial institutions spoon-feed loans to Greece, 80 percent of which cycle right out of Greece to pay holders of Greek bonds. Greece itself gets little benefit.
In return, Greece is supposed to continue imposing crushing austerity terms. Most onerously, the Greek government is expected to run a "primary" budget surplus (excluding interest payments) equal to 4.5 percent of GDP. Greece is also supposed to keep cutting wages.
Thanks to this medicine, the Greek economy keeps shrinking and debt as a share of Greek GDP keeps increasing. The policy is madness. But Europe's leaders refuse to relent.
The popularity of the new Greek government has soared at home, because Greece finally has leaders willing to take a stand. But will they prevail?
Tsipras has already moved to rescind some of the scheduled wage cuts and fire-sale privatizations required by the austerity deal. This enraged Greece's masters in Brussels and Berlin.
Europe's leaders have several ways to try to bring the Greeks to heel. Without continued flow of credits under the current austerity deal, Greece doesn't have the funds to pay its debtors. Greek banks also rely on short-term advances from the European Central Bank, which could be cut off it Greece disavows the agreement accepted under duress by previous Greek governments.
Some senior European officials also believe that the new policy of massive bond purchases by the European Central Bank of other nations' sovereign debt ("Quantitative Easing") creates some insulation for the rest of Europe if Greece faces a new crisis. All of this has created an official bullying on the part of Europe's leaders, led by Germany, that matches Greece's own bravado.
The crisis will reach a head in the coming days when the ECB decides whether or not to advance Greek banks the next round of cash under the current austerity for debt restructuring deal. If the ECB refuses, Greece will be plunged into a new financial crisis and a deep depression.
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It's anyone's guess how well such a crisis could be contained to Greece, but these things have a way of rattling financial markets and getting out of hand. Outside of Germany, Europe's own recovery is fragile to say the least.
A crisis, at least, would make clear that the current course is unsustainable. Tsipris and Varoufakis are self-described leftists. Varoufakis's academic specialty is game theory and bargaining. Some say his rudeness to Europe's stuffed shirts is carefully calculated. But it's not clear, even to Tsipras and Varoufakis, whether they will subject their long suffering country to deeper economic pain in the hope of "heightening the contradictions" and perhaps bluffing their way to a better deal.
If such a crisis of insolvency did occur, one outcome could be Greece leaving the euro and returning to the old drachma. Such a move could well be accompanied by mass economic dislocation and deeper suffering -- or the ECB and the IMF could decide to lubricate it with new loans to ease the transition as much as possible.
The larger problem is that there is no system of debt restructuring for countries that get into deep economic distress. At home, we have Chapter 11 of the bankruptcy code. If a corporation can no longer pay its debts, a bankruptcy judge sorts out its assets, decides who gets repaid first, and settles debts at so many cents on the dollar. The corporation can then survive with a fresh start.
Investors who put their money into corporate stocks and bonds do so as consenting adults, knowing that they may reap rewards but that they also might not get all of their money back. Bankruptcy has been viewed as a rational way of settling unpayable debts, ever since it was invented 1706 by ministers to Queen Anne.
But there is no Chapter 11 for countries. Indebted nations that can't repay creditors find themselves at the tender mercy of ad hoc schemes led by political leaders who usually side with bankers. The deal that was forced on the Greeks in 2010 is one of the worst ever.
So the world waits to see who will blink first -- the puritanical Germans who are leading the austerity crusade or the upstart Greeks.
In coming days, there will be great political and financial pressure to paper over this crisis with some kind of gesture that would allow the Germans and the ECB to claim that the old deal is being honored, and the Greek leaders to go back to Athens claiming that they negotiated at least token relief.
In a way, this would be the worst outcome of all. The austerity bargain is destroying the Greek economy in order to save it. The Greek people have had enough and they've elected a radical government to say so. In this case, the radicals are the bearers of common sense. The austerity deal doesn't need adjusting. It needs to be blown up.