The Greek government owes more than it can afford to pay, now or in the near future, at market interest rates.  There are two options: reduce the payments through some form of restructuring, or move the debt into the hands of people who are willing to charge below market rates for the foreseeable future.

In this decision, the International Monetary Fund has relatively little say – this is really a political decision to be made by the European Union, with discrete backing from the US and China.

While the EU leadership is surely tired of Greek politicians at this point, they also fear greatly the implications for other eurozone countries if Greece says it can’t pay or won’t pay.  The realization that spreads on Spanish government debt will rise sharply concentrates the mind wonderfully.

And the damage would not be limited to Spain – do not underestimate the smugness with which the eurozone has completely and utterly failed to prepare for any kind of sovereign default.  The lack of loss-absorbing capital in major European banks is a first-order scandal that could bring down governments.

Fortunately for the undeserving European policy elite, the IMF has plenty of money it can lend at low rates and the Europeans have plenty of votes at the IMF.  The IMF can also access considerably more funding as needed, with the agreement of the United States – which really does not want another short-term shock to the world economy.  And funding is available from China and other emerging market countries with large stockpiles of foreign exchange reserves.

China has every interest in making sure that the euro survives and prospers as a major reserve currency – to make sure that, over a longer period of time, the US dollar will decline as the primary place in which to hold public and primary rainy day funds.

The IMF will do as it is told by its major shareholders: help to refinance Greece, effectively protecting creditors and eurozone politicians to the fullest extent possible.

An edited version of this post appeared this morning on the NYT.com’s Room for Debate; it is used here with permission.

This post originally appeared at The Baseline Scenario and is reproduced here with permission.