It looks like Greece won't default. Yet.

Certainly not before next week. (How's that for optimism?) And almost certainly not before December.

But the financial markets are still pricing in a default by Greece on its government debt -- and all the chaos that would produce in the Greek economy and banking system, rippling outward to the rest of Europe and then the world -- sometime within the next five years.

Want to know when? I think you can get a pretty good idea by looking at the self-interest of the major parties involved: Greece and Germany. Greece will default when the self-interest of Greece is clearly weighted toward default or when the self-interest of Germany is clearly weighted toward allowing a default.

The self-interest of Germany argues for a relatively early default. Not December, but in the first half of 2012. The self-interest of Greece argues for a somewhat later default. Say, halfway through 2012 or a bit later. But both point toward 2012.

Image: Jim Jubak

Jim Jubak

A 2012 timeline

Everybody -- myself included -- looks at the pain and disruption that would be caused by a Greek default and says, "Nobody wants that to happen."

A Greek default would be much larger than other recent defaults, like the one in Argentina in 2001 or in Russia in 1998. Greek public debt now comes to about $500 billion. Argentina's debt when it defaulted was $82 billion, and Russia's was $79 billion. The size of Greece's public debt assures that the consequences of a Greek default would ravage its economy.

Inside Greece, banks would face huge losses on bonds in their portfolios and would have to close their doors until somebody -- who? -- recapitalized them. The economy would grind to a halt. Some projections put the contraction in the gross domestic product at more than of 25%. ATMs would stop working. Business credit would dry up, and businesses would shut their doors. The government would be unable to pay its bills.

But the damage wouldn't stop at Greece's borders. Bond buyers would flee Italian and Spanish government bonds, requiring the European Central Bank and the European Financial Stability Facility -- if it's set up by then -- to pour billions into buying those bonds to support the markets.

European banks would take a huge hit as the value of Greek government and corporate debt in their portfolios plunged. Big banks and insurance companies in Germany had a total exposure of $33 billion to Greek government and corporate debt as of the end of March, according to the Bank for International Settlements. French banks had exposure to Greek public and private debt of almost $80 billion.

That exposure is not spread evenly. In France, much of it is concentrated at three big banks: Crédit Agricole (CRARF, news), Société Générale (SCGLY, news)and BNP Paribas (BNPQY, news). In Germany, the government set up bad banks as part of its bailout of Hypo Real Estate Holding and WestLB. Those bad banks hold more than half of all the Greek debt held by German banks and would undoubtedly need another infusion of taxpayer cash.

How bad would it get?

Exactly how far the damage would go depends on to which degree that bond markets would punish the bonds of Portugal, Ireland, Italy and Spain, which, along with Greece, make up the so-called PIIGS group. The exposure of U.S. banks to Greek debt alone is relatively small. But U.S. banks have $670 billion in total exposure to the PIIGS group.

And it depends on whether a default would force Greece out of the euro. That's not an inevitable result. Greece could default on its huge debt to banks, but pay its relatively smaller debt to international creditors such as the International Monetary Fund, the European Union, and the ECB. Those institutions might even see a capital infusion into Greek banks -- along with a process that rolled up bad banks under new, perhaps overseas ownership -- as a better alternative than the end of the European Monetary Union. The consequences of a collapse of the euro would be huge on even a strong economy such as Germany's. UBS estimates that a collapse of the euro that left Germany on its own could produce a loss of as much as 20% to 25% of German GDP in the first year after a breakup.

Those scenarios seem so grim that it's hard to imagine any rational politician steering his or her country into such a storm. And that's been the strongest argument -- one that I've made on more than one occasion -- for saying that Greece won't default and that Europe will figure out a way to rescue the country from its debt spiral.

There is another way to look at the "Why would Greece default?" question. IMF economists studying past sovereign defaults came to a conclusion that turns any approach to answering this question on its head. It turns out that in past defaults -- including defaults by Argentina, Ecuador and Indonesia -- a country defaulted when it saw that a default was in its best interest.