The IMF apparently suggested, during the talks that led to the $ 1 Trillion ECU bailout package announced last week, that Greece "restructure" it's debt.
What does that mean? It means that Greece offer it's creditors 25 cents or 50 cents on the dollar in full settlement of their outstanding debt. That is the right answer and it is interesting that it was rejected.
Follow the logic of the current plan: dramatic cuts in Greek government spending, significant tax increases. Where does that lead? According to the ECU, the "austerity" program will, in time, lead to economic growth in three years. Really?
More likely is that we will have a repeat of the "Treaty of Versailles" problem that Keynes wrote so eloquently about nearly a century ago. The Greek economy will spiral downward out of control. Greek budget deficits will accelerate and the new loans will be worthless, pushing the problem back on Germany and France. Political unrest will, no doubt, ultimately force Greece out of the European union and into a default anyway. But, by then, the default will be a much more serious problem than a default would be today.
What does this mean for the European union? Ultimately, it means the break-up of the European Union and the Euro and the great experiment will descend into chaos.
Much simpler, much fairer, and much more sensible is to let Greece (and others) restructure their debt today. That is basically bankruptcy. But, bankruptcy is not all bad (and is usually unavoidable anyway). Postponing the problem only makes it worse.
That's what the equity markets are worried about.