BRUSSELS Euro zone leaders may reject the notion of a "Greek default." But private sector economists and political analysts are largely agreed that it is only a matter of time.
The questions that raises -- and they are vast -- include: what would the impact on European banks be? How much capital would need to be injected into the system? How would that be carried out? And would it stop contagion beyond Greece?
That Greece's debt dynamics are unsustainable is no longer seriously in question. With a debt-to-GDP ratio of around 160 percent and climbing, the burden on the state is close to unbearable. Further EU/IMF emergency aid is not guaranteed. Some analysts now expect a default as early as November or December.
Guntram Wolff, the deputy director of Bruegel, a think-tank whose analysis frequently informs EU policymaking, believes Greece's debt ratio needs to be reduced by around 50 percentage points if Athens is to approach long-term debt sustainability.
That would require writing down around 110-120 billion euros of outstanding loans, a fundamental restructuring that would be forced onto private sector creditors, constituting a default and bottom-line losses for many European and U.S. banks.
"There will have to be a recapitalizing of banks, especially in Greece but also in other euro zone economies' banking systems," said Wolff, who believes a Greek default could be on the cards during November.
"You would have to exempt the IMF loans and to some extent the loans by EU governments to Greece, and you would have to force it on the private sector," he said of the restructuring.
The biggest impact would undoubtedly be felt by Greek banks and financial institutions, which together hold around 40 billion euros of the nation's sovereign debt, according to figures from the Greek central bank.
French and German banks are the next biggest private creditors, although estimates of their exposure vary. The Bank for International Settlements puts French banks' total liabilities in Greece at $56 billion and Germany's at $24 billion. But the exposure to Greek sovereign debt is less, at about 10 billion euro or less for each country.
Either way, there are growing signals that European banks are considering or are taking steps to protect themselves against a default, by cutting their exposure to Greece wherever possible and by increasing their capital bases.
A month ago, euro zone officials roundly rejected suggestions by IMF chief Christine Lagarde that European banks needed a wholesale recapitalisation -- 200 billion euros was the hinted at figure -- saying bank stress tests carried out in July had shown the required amount to be less than 5 billion.
But the IMF's chief economist, Olivier Blanchard, said on Tuesday there had been a "180-degree change" in European attitudes in recent weeks, with the systemic nature of the debt crisis underlining the need for urgent action.
"The position of most European countries is, yes, we have a problem, capital needs to be put into the banks," he told the France24 news channel.
Publicly, European officials maintain there is no immediate need for the region's bank to be recapitalised, and they warn against loose talk of impending default, orderly or otherwise.
But Germany's deputy finance minister, Joerg Asmussen, acknowledged last month that banks may need to be prepared in the future, and pointed to the euro zone's bailout fund, the European Financial Stability Facility, as a potential source of funds if shareholders were unwilling or unable to stump up.
The EFSF has an effective capacity of 440 billion euros. Once changes to its structure are approved by euro zone member states, probably by the end of October, it will also have the flexibility to lend preemptively to at-risk governments so that they can recapitalise their banks, among other measures.
In a research note last week, Barclays Capital calculated that the EFSF would have to inject about 230 billion euros into European banks under an extreme scenario in which the sovereign debts of Greece, Spain, Italy, Ireland and Portugal all had to be written down by 50 percent.
While such a widespread writedown seems unlikely -- part of the rationale for an orderly Greek default would be to head off the threat of broader contagion -- it cannot be ruled out.
That is why even those analysts who expect a default say everything will be done politically to prevent it happening any time soon -- simply because the repercussions are incalculable.
"Even if you imagine an orderly default that reduces Greek debt from around 160 percent to 100 percent, we're talking about such a big restructuring that it would lead to an earthquake," said Janis Emmanouilidis, a senior analyst at the European Policy Center, a think tank in Brussels.
"The effects would be enormous and probably very difficult to contain. It's not something that would leave other euro zone countries unaffected." As a result, he said, leaders will wait as long as they can before accepting the inevitable.
One finance expert who is advising governments on preparing for a Greek default says the major economies in the euro zone are ready for it, even if they are not yet actively courting it.
The impact on non-Greek banks can be contained in most states, he said, but the problem is what to do with Greek banks, which will need to be nationalised, and weaker banks in weaker euro zone countries, such as Portugal and Spain.
While question marks remain, the adviser, who asked not to be quoted because of the sensitivity of his position, sees a default by December.
Wolff, of Bruegel, expects a default trigger sooner. Under a deal agreed on July 21, private sector creditors to Greece are supposed to take part in a voluntary debt buyback scheme designed to lighten Athens' debt burden.
Greece wants a participation rate of 90 percent, but it is currently running at less than 75 percent. If the threshold is not reached, Greece could turn away from the deal and instead insist on a much deeper, non-voluntary debt writedown.
"I think it's going to be happening once we have the new EFSF in place and a new ECB president, so basically in November," said Wolff.
"In the middle of October I think there will have to be a decision not to go ahead with the current PSI (private sector involvement) and in November you look at a more fundamental debt restructuring," he said.
The decision will be taken by Greece in coordination with the ECB and the Eurogroup countries. If taken, the concern then will be what impact it has on the wider euro zone and world.
"There is very little you can do," said one euro zone official. "No one can know where money would run to in a situation like that... The reason why Geithner came to Poland is because he does not have any wall (to stop contagion). Neither does the UK."
Wolff expects a run on other euro zone countries, but hopes it can be contained. "The way to ringfence this is to empower the EFSF to do whatever it takes and give it access to unlimited ECB liquidity."
(Additional reporting by Steve Slater in London, John O'Donnell in Brussels and Alexandra Hudson in Berlin; editing by Janet McBride)