It's looking more and more likely that the Greek government will eventually fail to make payments on its bonds on time and in full—in other words, default is looming. Traders put a more than 70 percent probability on a Greek sovereign default some time in the next five years, judging from the prices they're paying for protection in the credit-default swap market. The question of the hour: Should Europe keep fighting to postpone the inevitable or begin arranging for an "orderly" default that causes the least possible collateral damage?

The case for delaying a default is that European banks need more time to repair balance sheets that were devastated by the 2007-09 financial crisis. The profits they're earning now are rebuilding their capital. The longer that Greece can be kept afloat, the better Europe's banks will be able to withstand the losses they'll be forced to recognize if Greece goes under. European banks and the European Central Bank have a strong incentive to extend and pretend.

Those who favor a default now say that European governments—and hence, ordinary taxpayers—are throwing good money after bad by extending fresh credit to Greece to keep it afloat. They point to Uruguay's 2003 restructuring, which extended bond maturities by five years at the original interest rates, as a success story. New York University economist Nouriel Roubini has been pounding the table for a Greek debt restructuring since last June.

Greece's problems are much worse than Uruguay's, so the haircut suffered by banks and other creditors would have to be deeper. But let's be clear: The damage from bad policy has already been done. There is no painless way out of Europe's mess.