But there are more issues that arise in the scenario in which Greece is given a second chance and kept inside the EMU. The slippery slope is that if the bond haircut is high, then Portugal, Ireland, Spain and Italy see that Greece has been given a second chance with much of its debt forgiven, they will want the same treatment. After all, why should these countries institute austerity to pay the private sector and often foreign debt holders when Greece doesn't have to.
In order to avoid the contagion that the others will want the same deal as Greece, there will have to be a consequence that dissuades them. The only consequence I can think of that is serious enough to dissuade them is expulsion from the EMU. Therefore, in order to avoid contagion under a scenario of an 80% bond haircut, it is essential that Greece leave the monetary union, and that the EU set up and strictly enforce expulsion criteria.
Ultimately, though, because the four problem countries all have the same entitlement mentality, they will never be able to maintain the required fiscal discipline, and will ultimately be expelled. Apparently, the European politicians recognize this. So, the 22.5% haircut deal currently on the table simply kicks the can further down the road. The deal on the table cannot ultimately work.