Politicians and commentators have spent the past few weeks focusing on the morality of Greece’s moral hazard, with a sharp division between those who see a feckless borrower trying to live off German generosity and those who see an entire people reduced to poverty by misguided austerity.

Neither view takes account of the hazard, which in the short run almost always trumps the morals. Unlike the morals, though, so far the world remains convinced that the hazard runs almost exclusively Greece’s way.

There are two sets of moral hazard over Greece. First is the moral hazard of the lenders. Just like the criminally irresponsible banks in the run up to the 2007 subprime crisis, lenders took no account of Greece’s ability to repay when advancing them ludicrously cheap loans. But when the crisis first hit, the German and French banks and other owners of Greek bonds were bailed out, allowing them to escape relatively unscathed. (The 2012 haircut hurt those bondholders who stayed in, but Europe’s banks had already cut their exposure to Greece.)

Second, there’s the moral hazard of the eurozone periphery. For a decade they took full advantage of easy money and lenders who believed that Greek government bonds offered a “risk free rate”. If the Greeks are allowed to walk away from that debt, Spaniards, Portuguese, Italians and Irish will quite reasonably say they should be let off, too.

To avoid serious political contagion, Germany needs to ensure the rest of the periphery sees Greece suffer, preferably on wall-to-wall news coverage.

When German Chancellor Angela Merkel and François Hollande, French president, meet tonight, the second moral hazard will be the bigger risk.

In large part, though, this is because markets are offering no immediate hazard. Politicians find it easiest to ignore moral hazard when there is a crisis — most obviously in 2008 when the US Congress rejected a $700bn rescue programme on the grounds that banks should face the consequences of their actions, then hurriedly approved it when shares crashed.

For now markets see little hazard, buttressed as they are by the promise of support from the European Central Bank. The euro has made back all its early losses and is very slightly up this morning, eurozone shares are down only 1.7 per cent, although led down by Italian banks, and periphery bond spreads are up, but all well within the range of a normal trading day.

There is still hope that a compromise will be found, that Europe’s usual pragmatism will cut through the Germanic debt ideology. The Greek answer was clear. The question was not. That might help creditor nations fudge the situation, interpreting the Greek vote not as against the euro but merely as a cry against austerity.

But with markets suggesting there is little hazard out there, the region’s politicians are free to indulge their domestic audiences — and that in itself reduces the chances of a deal.


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