**The European Central Bank’s significant holdings of Greek government bonds have left it exposed to considerable risks, much more than the markets or what we read in the business press would lead us to believe (perhaps 100 billion euros).

The currency of a country whose central bank has suffered a mortal blow has little chance of survival. Athens understands this very well and takes advantage of it. Why should Europe give to Greek politicians, who clearly have shown no intention of introducing reforms worthy of the name, a weapon that can be turned against her? We must protect the ECB, and now.

Of course, giving guarantees would entail a risk to the taxpayer, and that is precisely what explains the immobility of Europe’s leaders.**

The cunning game played by Greek politicians

They must grasp, though, that if they take this threat out of the hands of their blackmailers, the risk they are exposed to will lessen. If the Greek politicians perceive that their cunning little game is not working, they might change their tone and make real efforts to undertake reforms.

The European taxpayer will then get a good deal: giving guarantees, as discussed above, lowers the risk of a costly default. Prevention is better than cure.

Putting larger amounts into the European Stability Mechanism (MES), the permanent relief fund [to come into force July 1], will on the contrary save money. And committing more money to protect the ECB would, for the same reasons, also save money. This is what is called "promising to increase spending," but that does not mean that the money will actually be spent.

Whether Greece defaults or not, the Germans want to exclude it from the eurozone and are trying to gain time to bring Italy and Spain on-side to get those countries’ support in coping with the turbulence that Greece’s exit may provoke. But that very fear could merely speed up a default by Greece. Like a bee about to die, it can still inflicts a fatal sting.

European policymakers cannot afford the risk that Greece, feeling that it is about to excluded from the euro, will launch a final attack like a dying bee and default. They must protect the ECB from what could be a fatal sting.

Guarantees for the ECB

**The International Monetary Fund (IMF) is also entering this game. The more Europe protects itself, the less likely the possibility that the IMF will intervene with an additional contribution to the bailout funds. European leaders are reluctant to seek a greater contribution from the IMF. For the ECB, though, it’s a dangerous game. If the IMF decides not to put in additional funds and Greece does default, the ECB will be totally exposed. Better to take protective measures and let the IMF play the cards it wants to play.

The factor that could most swiftly trigger a Greek default could be a dispute over the losses that private investors in Greek bonds would have to accept if the relief fund had to be deployed for Greece.

Agreement alone, however, is unlikely to be enough to stave off a default. The haircut for private investors would be so large that the rating agencies would not be able to call it "voluntary”, and would therefore claim that it is a form of default. No one knows what this could entail. It could trigger mechanisms to compensate the bond holders for their losses, and it could nullify the ECB guarantees for banks. In this climate of uncertainty, protecting the ECB is the top priority.

Almost all the attempts by European leaders so far have failed, which explains why the crisis persists. This may be their last chance. If they fail to demonstrate greater competence in defending the ECB, it may be too late both for it and for the euro. The ECB must be able to use tax revenues. The time to provide guarantees to the ECB is now.**