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There is more and more speculation that Greece is about to leave the euro. The country has been unable to form a government, and new elections seem set to give power to parties that reject the spending cuts that have been agreed with other eurozone governments and the International Monetary Fund.

But without those spending cuts, the Greek government will receive no more bailout loans, it won't have the money to pay its debts, the Greek banks will probably go bust, and the European Central Bank may be forced to cut Greece loose from the single currency. What would this mean for Greece and the rest of Europe?

Greek meltdown

Greece's banks would be facing collapse. People's savings would be frozen. Many businesses would go bankrupt. The cost of imports - which in Greece includes a lot of its food and medicine - could double, triple or even quadruple as the new drachma currency plummets in value. With their banks bust, Greeks would find it impossible to borrow, making it impossible for a while to finance the import of some goods at all. One of Greece's biggest industries, tourism, could be disrupted by political and social turmoil.

In the longer run, Greece's economy should benefit from having a much more competitive exchange rate. But its underlying problems, including the government's chronic overspending, may not go away.

Bank runs

Ordinary Greeks may queue up to empty their bank accounts before they get frozen and converted into drachmas that lose half or more of their value. Depositors in other eurozone countries seen as being at risk of leaving the euro - Spain, Italy - may also move their money to the safety of a German bank account, sparking a banking crisis in southern Europe.

Confidence in other banks that have lent heavily to southern Europe- such as the French banks - may also collapse. The banking crisis could spread worldwide, just like in 2008. The European Central Bank may have to provide trillions of euros in rescue loans to the banks. Some governments may not have enough money to prop up their banks with the extra capital needed to absorb losses and restore confidence; the banks could then go bankrupt.

Business bankruptcies

Greek businesses face a legal and financial disaster. Some contracts governed by Greek law are converted into drachmas, while other foreign law contracts remain in euros. Many contracts could end up in litigation over whether they should be converted or not.

Greek companies who still owe big debts in euros to foreign lenders, but whose main sources of income are converted to devalued drachmas, will be unable to repay their debts. Many businesses will be left insolvent - their debts worth more than the value of everything they own - and will be facing bankruptcy. Foreign lenders and business partners of Greek companies will be looking at big losses.

Sovereign debt crisis

Sovereign debt is the money a government borrows from its own citizens or from investors around the world. But if Greece leaves the eurozone, setting a precedent that such a thing can happen, then investors will become very nervous about lending to other struggling eurozone countries.

This could leave the governments of Spain and Italy short of money and in need of a bailout. These two huge countries together account for 28% of the eurozone's total economy, but the EU's bailout fund currently doesn't have enough money to prop both of them up. Even France's government could get into trouble if it needed to bail out its enormous banking sector.

Source URL: http://www.bbc.co.uk/news/business-18074674