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A man walks past a wall covered with graffiti in central Athens on June 19, 2012.Pascal Rossignol/Reuters

Can a failed economic state exist within a (barely) functioning political and social state? Greece is proving that it can. The waves of bailout money from the European Union and the International Monetary Fund go to the public sector, not the private sector. To be sure, the public sector is in rough shape, as wages and pensions are cut. But the Greek private sector is dying.

I just spent three days in Athens and the stories I got from entrepreneurs and shop owners were distressingly similar: My clients don't pay me, so I can't pay my suppliers, who can't pay their suppliers. And so on. The money flow among businesses is slowing to a trickle and companies are failing even though the customers have not entirely vanished.

Example: Greek pharmacies are closing their doors everywhere because the essentially bankrupt government has been slow to cover its share of subsidized drug costs. Pharmacists, as a result, have been demanding that pensioners pay the full sticker price for drugs. The pensioners refuse and the cash flow disappears.

The private sector crunch is going from worrisome to catastrophic. Businesses are falling apart in every industry, sending the unemployment rate Acropolis high. The national jobless rate is more than 22 per cent; youth unemployment is more than 50 per cent.

Foreign investment, meanwhile, has dropped to pretty much zero, and for good reason. Why invest in a country which may leave, or be forced out, of the euro zone at any time? No sane project manager is going to invest, say, €10-million in a Greek factory when there is a good chance its value would fall by half or more if the drachma makes an inglorious return. Some foreign companies -- among them the French banks and French supermarket giant Carrefour -- are so shell-shocked by the tanking Greek economy and fearful of the drachma's reappearance that they are retreating from Greece.

Greece is also becoming an uninsurable risk. Accounts receivable can't be covered because insurers no longer believe that bills will be paid.

The combination of failing private businesses, disappearing foreign investment and unobtainable trade insurance is pulverizing Greek businesses. Saving civil servants' jobs is not going to save Greece. Creating productive private sector jobs that generate tax revenue will.

The private-sector crunch is reflected in the negative growth rates. Since 2009, when the debt crisis started – thank you, Greece – gross domestic product has fallen by almost 20 per cent. The economy is expected to fall by 5 per cent next year, but many economists think the true figure will be double that. Forget recession. A full-blown depression is becoming increasingly likely. Another bailout would be inevitable, unless the EU and the IMF were to cut Greece loose as a hopeless cause.

So how can the private sector be revived?

It's a question of confidence. Foreign investors have to believe that Greece will not leave the euro zone even if it defaults on its debt. There is a precedent for this. In February, Greece effectively defaulted on the sovereign bonds held by private investors by slashing their net present value by 70 per cent in a €100-billion debt "haircut."

The problem is that none of Greece's paymasters (read: German chancellor Angela Merkel) is going to assure the euro zone that Greece will stay put forever. But hints in that direction could certainly be made.

The EU and the IMF can do their part by supporting the private sector wherever and however possible, though diverting funds to the private sector is impossible. Under an inevitable renegotiated bailout deal, they could insist that bailout funds be used for projects such as modernizing the tax-collection system, creating a property database, building infrastructure and vocational schools, and not just supporting the bloated civil service.

Finally, the banks have to be stabilized, so they can lend to businesses again.

None of these efforts would be easy. But the option is to see the private sector fail, which would starve the government of what little tax revenue remains, send the jobless rate soaring and trigger social unrest. Greece's debt to gross domestic product would go from the ugly to the absurd. Saving Greece's public sector while allowing the private sector to fade away is folly. Bailouts should have a greater calling.

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