Nearly five years into the global credit crunch, you get a feeling for when something has reached the point of no return, when no amount of reassurance, promises or policies will fight the tide of markets. But to be sure, this is not to define markets as pure ‘speculators’, rather rational individuals and entities that are removing deposits from Greek banks, reducing their exposures to all types of market risk and doing their best not to be crushed by a moving train.

The moving train is, of course, Greece. As well as reports of large scale withdrawals from Greek banks, we’ve had (unconfirmed, then denied) reports that the ECB is also refusing liquidity requests from Greek banks, pushing them to the Greek central bank because of the lack of recapitalisation undertaken. We’ve seen sharp increases in forward Libor-OIS spreads, the measure of interbank liquidity risk that was so watched during the early days of the crisis. From being taboo in official circles, a Greek exit is now more openly being discussed, rather than dismissed outright.

At the same time, after two years of fire-fighting the Greek and wider sovereign crises, there is no policy response that can credibly stem the tide. We’ve had two large scale EU/IMF rescue packages, a tortuous ‘voluntary’ private sector-restructuring and vast lending form the ECB (with ever lower collateral standards applied). The more credible response now from the authorities would be measures to stem contagion elsewhere, particularly with respect to bank deposits in other eurozone countries now that permitted cross-border lending between deposit-guarantee schemes will not be workable

Contagion remains the biggest single risk, given that a Greek exit will mean that what was previously presented as irreversible and unthinkable will have become reality. This is where efforts now need to be focused, otherwise the single currency will be left horribly exposed by a Greek exit. Furthermore, all efforts to ‘save’ Greece from here on in will have been wasted and at the cost of failing to deal with the contagion issue. Policy-makers face a critical choice this week. Let’s hope they choose the right one.