> what would have been the alternative?

An early writedown of some debt and extension of other, enabling the economy to return to growth and service the remaining debt.

Re 1.: Pension funds and other institutional investors invest in equity and debt world wide, taking into account risk and return. Sometimes they make mistakes (or even not - sometimes the dice fall badly), and an investment goes sour. That's the market at work. In this case, however, European put massive amounts of money into Greece that were not used to prop up the economy, but to bail out investments by German and French banks. So, basically a transfer from the European tax payer to some banks.

2. It would make imports very expensive, but free up the domestic economy and make it more competitive.

"Optimum currency area" describes what's necessary for a currency union: homogeneity wrt external shocks (not the case in the EU), high factor mobility (limited in the EU, due to language/culture), or internal transfer payments.

In my view, Europe sat down for a nice dinner (10 years ago with the introduction of the Euro) in a restaurant and enjoyed it over a decade (with massive growth financed by cheap debt in many "peripheral" countries), and when the bill came (oops, we need these internal transfers now) - refused to pay. Shameful.