A goal for the London football club Tottenham Hotspur at the weekend was described by a commentator as “almost unstoppable”. A similar oxymoron springs to mind concerning Greece. Monday’s three-notch downgrade of its sovereign credit rating by Moody’s Investors Service could be said to be “almost inevitable”. With its 2-year bonds trading to yield over 15 per cent, Greek sovereign debt is beyond junk. Investors think a restructuring by Athens is as good as done.

The question is whether they are right. Moody’s rationale for the rating action does not gloss over the likelihood of a Greek default. Greece’s debt burden is set to reach 150 per cent of gross domestic product; and it must refinance €211bn of debt between 2013 and 2015. The European Central Bank looks set to raise interest rates, adding to the mountainous targets the government must meet in return for its €110bn bail-out. The ingredients are there for a default.

It has been axiomatic until now that a default must be avoided at all costs. What might such an event look like? A sudden declaration of inability to pay is improbable; Greece’s dependence on external financing says that already. An agreed process involving investors, creditors and the government is more likely, and would be more orderly. The biggest losers would be eurozone financial institutions. Of the €325bn of government debt outstanding at the end of 2010, Greek and other eurozone banks held €120bn and non-banks held €119bn, according to the think tank Bruegel. (The percentages are broadly the same for Irish and Portuguese debt.)

The rating action is not a game-changer for the European Union – yet. The summit later this month might produce a positive surprise. But if that is not forthcoming, eurozone leaders may soon find themselves grappling with the “almost unthinkable” – a default on euro-denominated sovereign debt.

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