There’s no time to waste. Athens’s agreement to accelerate its austerity program is probably enough to secure the next payment of 8 billion euros in bailout cash from its euro zone partners and the International Monetary Fund. But the Greek government appears to be close to the bursting point. If it had to agree to more austerity in three months’ time, when another dollop of cash is due, it could collapse. That might set off a disorderly default and mayhem throughout the European — and even world — economy.

It would be far better for Greece, the euro zone and the I.M.F. to push through an orderly default. Athens would still have to commit to reforming its economy. But, in return, its debts might be halved and the rest of Europe would continue to support Greek banks.

An orderly default, though, is not enough to limit the fallout. The rest of the euro zone would still, among other things, need to shore up its own banks. After ignoring the I.M.F.’s suggestions in August that this was required, various European policy makers, including Jean-Claude Trichet, the European Central Bank’s president, have warmed to the idea.

It’s not clear, though, that the governments yet have the stomach to force through the immense recapitalizations needed. Breakingviews calculates that 175 billion euros would make sure that banks were strong enough to both withstand their exposures to over-indebted governments and cope with the weakening economy. While some banks could raise capital themselves, many would need an infusion of taxpayers’ cash and would end up wholly or partly nationalized.

Although proper recapitalization would help calm nerves, banks still might not be able to raise long-term funds in the market. At the moment, many of the region’s lenders depend on borrowing short-term money from the central bank. While that prevents them from going bust, they feel so anxious that they are reluctant to lend to businesses. The euro zone is on the edge of a new credit squeeze. If this problem isn’t solved soon, the region could tip into a deep recession.

The European Central Bank has started loosening its lending policies, for example by letting banks borrow dollars for three months. But either the central bank or the European Financial Stability Facility, the region’s bailout fund, needs to find a way of giving banks access to longer-term loans.

If all this happens, the banks will be well placed to withstand a Greek default as well as to play their part in preventing a deep recession. But other countries, especially Italy, will still be exposed. Its dysfunctional government has been so slow to manage its nearly 2 trillion euros of debt that it could lose access to the bond markets. If that happened, the stability facility, which has only 300 billion euros of borrowing power left, would not be big enough to help. The fund’s firepower needs to be expanded.

After initially turning their back on the idea, European policy makers seem to be coming around. Since nobody wants to go through another round of approvals by 17 national parliaments, the best way of making do with the current authorizations would be for the stability facility to guarantee the initial loss on new government bonds. If the first 20 percent was indemnified, the fund’s effective war chest would rise to 1.5 trillion euros.

Not that such money should be given without conditions. Italy, for example, should be required to agree to a reform program if it needs the facility. The humiliation might be enough to topple Prime Minister Silvio Berlusconi, whose erratic leadership is partly responsible for the country’s plight. That would be a bonus. But even without it, a beefed-up bailout mechanism would ensure that the whole of Europe could withstand a Greek default. HUGO DIXON

For more independent financial commentary and analysis, visit www.breakingviews.com.

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