GREECE, progenitor of the euro zone's debt drama, is back at centre-stage. The reason is a battle between the Greek government, its European and IMF rescuers, and the holders of Greek bonds over the terms of a “voluntary” reduction in its private debts. Greece's economy is in far worse shape than when the outlines of a deal were put together last October, so there is a bigger financial hole to plug. Germany and other rescuers don't want to offer more money, not least because Greece's politicians have broken so many of the promises they made to reform. Bondholders don't want to take a bigger hit.

If no deal is in place by March 20th, when a big bond payment is due, Greece will be pushed into a chaotic default, which would increase the risk that the country is forced out of the euro. That is a frightening prospect. The ensuing chaos and contagion could fell the single currency, not least because Europe's governments have made little progress on building a “firewall” around countries like Italy and Spain.

What is the best way out of this mess? Step one is to force private bondholders to take more losses. They have been treated with kid gloves so far because European governments insist the debt deal must be voluntary, thanks in part to a misplaced fear of triggering credit-default swaps. That must change. Discard the veneer of voluntarism and Greece can be tougher on its creditors. It should pass a law that retroactively introduces collective-action clauses into all domestic-debt contracts (making it easier to impose debt deals on recalcitrant bondholders). If it does this now there is still, just, enough time to organise a big, coercive, but orderly, restructuring of Greek bonds by March 20th.

That is the route this newspaper has long advocated. A year ago it would have gone a long way towards solving Greece's problems. Unfortunately, today it is no longer enough. The economy is in such a state, with slumping output and a still-gaping budget deficit, that there is no realistic prospect of reducing its debts to a sustainable level by hitting private bondholders alone. Debts owed to official bodies—from the bonds held by the European Central Bank to the loans from euro-zone governments—will at some point need to be reduced too.

Greece will need propping up for a long time. Virtually no progress has been made in overhauling the economy. Although wages have fallen slightly, the country remains chronically uncompetitive (see article). Greece's rescuers bear some blame: they focused too much on raising taxes and too little on reforming the state and freeing up the economy. But the real culprit is the Greek government, which has proved singularly incapable of implementing the reforms needed to allow the economy to grow.

 Explore our interactive guide to Europe's troubled economies

With so little to show for the efforts so far, would it be better for Greece and its European creditors if the country simply left the single currency? If Greece had its own currency, devaluing it would surely be part of the route to greater competitiveness. And leaving the euro might just be the shock Greece's political system needs to galvanise reform.

Yet the costs of a Greek exit still outweigh the benefits. Recreating a currency is far harder than devaluing an existing one. Some industries, such as tourism, would eventually benefit, but in the short term jettisoning the euro would cause devastating disruption. The legal mess of broken contracts it would create would take years to sort out. Greece could face hyperinflation and become a failed state. Not surprisingly, a large majority of Greeks want to keep the euro.

Playing for time

For the rest of Europe, a Greek exit would also be dangerous: it could cause bank runs, capital flight and soaring bond yields in Portugal, Italy and beyond. But over time the balance of risks will change. Once a tough debt restructuring has been imposed on Greece's private creditors, the country's fate will have less impact on other bond markets. As reforms in Italy and Spain gain momentum, the distinctions between Greece and others will become clearer. And over the coming months European leaders, with luck, will agree on a permanent way to boost their rescue funds. All this would make the spectre of a Greek exit much less frightening for the rest of the euro zone.

Greece's European rescuers should offer the country a clear choice. If it embraces tough reforms, it will get fresh funds and a gradual reduction of its official debts. But if it continues its current path of inaction, it may not be able to avoid an exit. As the costs to others of a Greek departure from the euro fall, so that threat will become more credible.