Advantage Greece

Greece looks to all the world like a country with its back against the wall, forced by the markets and the European Commission to spit out new austerity measures this morning, in advance of the Greek prime minister's crucial meeting with the German chancellor on Friday.

But don't count them out yet. The Greeks have three cards up their sleeve. And make no mistake: behind the scenes they are playing them for all their worth.

The first is that if there's one thing the European Central Bank hates more than profligate governments, it's the overpowerful - and oh-so-American - ratings agencies. And right now, as Greek officials keep reminding their eurozone colleagues, one single ratings agency has the capacity to send the Greek financial system over the edge.

I'm exaggerating. But trust me, so are the Greeks.

As I've discussed before, the ECB has been giving back-door help to the likes of Greece since the start of the financial crisis, by letting eurozone banks post lower-rated sovereign debt as collateral for oodles of cheap liquidity.

Those rules were supposed to go back to normal at the end of the year. As of today, Greek debt would still qualify. But if Moody's follows the other leading ratings agencies and further downgrades Greece, Greek debt would be beyond the pale.

That could have a massive effect on the price of Greek debt: arguably, the single most important factor propping it up in the past year has been that it can be swapped for free money at the ECB.

And if Greek debt tumbles in value, that, in turn, could cause big problems for not just Greek banks but all the many other banks across the Eurozone who are holding Greek sovereign debt.

Yesterday, Ewald Nowotny, a member of the ECB Governing Council, said it was "an unacceptable situation" that "the fate of Greece, and if you are going to be more dramatic, the fate of Europe depends on the judgement of one ratings agency."

The ECB President Jean-Claude Trichet has always said the Bank would not change the rules for just one country. But it can and will change the rules for the sake of the eurozone banking system. Especially if can take the US ratings agencies down a few pegs at the same time.

When the terms of the European support package for Greece are revealed, expect the ECB and its collateral rules to be in the mix.

The Greeks' second secret weapon is that there is, in fact, nothing to stop them going to the IMF - with of without the EU's blessing. If their European partners push them too hard, that is almost certainly what they will do.

Threatening to go to the IMF is a last resort (it could also backfire - because it's not clear that the IMF, on the basis of Greece's, "quota share" at the Fund, would be in a position to give it a big enough loan.) But given French and German hostility to the idea of an IMF deal, it's a useful card for the Greeks to have.

Finally - there's that secret weapon which is not a secret at all. Greece is in the eurozone. And there is zero confidence that a Greek meltdown could be contained within Greek national borders. If Greece goes down, most in the European Commission now think Portugal and maybe Spain will follow.

As I've said before, there ought to be a way for Greece to restructure its debt, without the sky falling in on everyone's heads.

When Argentina defaulted on its sovereign debt at the end of 2001 the short-term results were extremely ugly. But the government was back borrowing from the global market barely three years later, and the economy grew by more than 8% a year from 2003 to 2007.

For all that, when you talk to officials in Brussels or Frankfurt, they cite Argentina as the example to be avoided at all costs.

For the powers that be in the eurozone, it is simply inconceivable that Greece should be allowed to renege on its debts. As long as that remains true, Greece is a lot stronger than it looks.