Most of the banks that loaned the money were akin to Credit Unions or similar. EG: La Caixa in Spain, the Landesbanks in Germany [1], etc.
So they had to give in to the banks, because one way or another the Governments were on the hook for that (due to deposit insurance for instance).
Now the question is "why did the banks lend to Greece?" and the answer is because Greece and other countries pushed in the Basel agreements to have a risk weight of 0% [2] in order for them to accept the agreements (or else the Greek banks themselves would have been reluctant to hold Greek bonds).
At the end of the day, even if default is allowed, the borrowing parties should bear responsibility, in the same way people do when they borrow too much and then default. This is not moralistic but practical, because otherwise you end up with huge moral hazards and everyone and their brothers defaulting all the time...
Most of the banks that loaned the money were akin to Credit Unions or similar. EG: La Caixa in Spain, the Landesbanks in Germany [1], etc.
So they had to give in to the banks, because one way or another the Governments were on the hook for that (due to deposit insurance for instance).
Now the question is "why did the banks lend to Greece?" and the answer is because Greece and other countries pushed in the Basel agreements to have a risk weight of 0% [2] in order for them to accept the agreements (or else the Greek banks themselves would have been reluctant to hold Greek bonds).
At the end of the day, even if default is allowed, the borrowing parties should bear responsibility, in the same way people do when they borrow too much and then default. This is not moralistic but practical, because otherwise you end up with huge moral hazards and everyone and their brothers defaulting all the time...
[1] https://en.wikipedia.org/wiki/Landesbank [2] http://www.voxeu.org/debates/commentaries/basel-ii-concept-l...