One way of looking at the problem of zero interest rate is that lenders have a lot of money to lend, but no one to lend it to, as borrowers have a lot of debt, on which they are already paying a high interest. Big supply, low demand. This is the expected end state of the lend-borrow cycle. It is a stable state, which can only be changed by sufficient disturbance. Even the massive borrowing of the government is not enough to disturb it, so the amount of money lenders are holding must be even larger. The only way to get off this state is to eliminate the debt, so the lenders can go back to lending the money to the borrowers. Note, this does not require the lenders to give up their actual money, just their claims on the borrowers.
If we suppose the borrower has nothing, then the only actual loss to the lender is the claim on the future income stream of the borrower.
If we look at Greece under austerity, its income stream will be negative for the foreseeable future. Thus, the Germans, unless they propose to buy up Greece, will do themselves a favor by forgiving the Greek debt. Lending more will only result in larger default down the road. So they will also do themselves a favor by refusing to lend the Greeks any more money, but here the problem is the producer-consumer problem: The Greeks are a net consumer of German production, and thus stimulate the German economy (at the expense of their own. See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html ) Without the borrowed money, the Greeks won't be able to continue consuming German production.
However, because of fractional reserve banking, Greek debt is collateral for other money. People borrowed to lend. And others borrowed to lend. That is, Greek debt is money, to its holders, and acts like money. If it disappears, those who borrowed to lend to Greece will have no collateral. The bottom line is forgiving the debt would result in a contraction of the money supply. Because the loans are highly leveraged, that is capital requirements are low, the contraction is likely to be disproportionate to the actual default. This would put additional deflationary pressures on other countries of the Euro periphery, and would also make it more difficult for these countries to pay their debts.
Refusing to lend the Greeks any more money will force the Greeks to pay their taxes, which they seem to be unwilling to do, and/or contract their public sector.
Of course, this does not address the other basic problem, which is there is too much money at the top of the economic pyramid. Since this leads to a contraction of demand in the rest of the economy for real production, there are no profitable real investments for this money to make. The financial sectors of the various nations are simply too big to be supported by the real economies. For US, see: http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html )
Thus a large contraction of money at the top might be economically therapeutic. (And with less money to lend, interest rates might well go up, though this itself might stimulate inflation. Hmm...) However, the government should just guarantee the money of the depositors, (ie taxpayers and consumers,) rather than the banks, which need a shaking out anyway. Indeed, guaranteeing the banks just aggravates the problem.
