It is time to recognise that Greece is not just suffering from a liquidity crisis; it is facing an insolvency crisis too. Rating agencies have started to downgrade its public debt to junk level, while spreads on Greek sovereign bonds last week spiked to new highs. The €110bn bail-out agreed by the European Union and the International Monetary Fund in May only delays the inevitable default and risks making it disorderly when it comes. Instead, an orderly restructuring of Greece's public debt is needed now.

The austerity measures to which Greece signed up as a condition of its bail-out require a draconian fiscal adjustment of 10 per cent of gross domestic product. This would prolong the country's recession and still leave it with a public debt-to-GDP ratio of 148 per cent by 2016. At this level, even a small shock is likely to trigger a further debt crisis. Sharp austerity may be needed – as agreed by the Group of 20 over the weekend – to stabilise debt-to-GDP ratios by 2016 in advanced economies; but for Greece such “stabilisation” would be at levels that are unsustainable.

Compare Greece today with Argentina in 1998-2001, a crisis that culminated in a disorderly default. Argentina's fiscal deficit at the onset was 3 per cent of GDP; Greece's is 13.6 per cent. Argentina's public debt was 50 per cent of GDP; Greece's is 115 per cent and rising. Argentina had a current account deficit of 2 per cent of GDP; Greece's is now 10 per cent. If Argentina was insolvent, Greece is insolvent to the power of two or three.