Market turmoil
Nervous investors and lenders around the world may start selling off risky investments and move their money into safe havens. Stock markets may plunge. High-risk borrowers could face sharply higher borrowing costs, if they can borrow at all.
As eurozone governments and the European Central Bank face enormous losses on the loans they gave to Greece, public opinion in Germany may turn against providing the even larger bailouts probably now needed by big countries like Italy and Spain. The ECB's role of quietly providing rescue loans to these countries in recent months would be exposed and could become politically explosive, making it harder for the ECB to continue to prop up their economies.
However, the threat of a meltdown might push Europe's or the eurozone's governments to agree a comprehensive solution - either dissolution of the single currency, or more integration, perhaps through a democratically-elected European presidency tasked with overseeing a massive round of bank rescues, government guarantees and growth-stimulating infrastructure investment.
Nervous investors and lenders around the world may start selling off risky investments and move their money into safe havens. Stock markets may plunge. High-risk borrowers could face sharply higher borrowing costs, if they can borrow at all.
Meanwhile, safe investments such as the dollar, the yen, the Swiss franc, gold and perhaps even the pound would rise, while safe governments such as those of the US, Japan, Germany and even the UK could borrow more cheaply. And it's not all bad news - the oil price may well fall sharply.
Political backlashAs eurozone governments and the European Central Bank face enormous losses on the loans they gave to Greece, public opinion in Germany may turn against providing the even larger bailouts probably now needed by big countries like Italy and Spain. The ECB's role of quietly providing rescue loans to these countries in recent months would be exposed and could become politically explosive, making it harder for the ECB to continue to prop up their economies.
However, the threat of a meltdown might push Europe's or the eurozone's governments to agree a comprehensive solution - either dissolution of the single currency, or more integration, perhaps through a democratically-elected European presidency tasked with overseeing a massive round of bank rescues, government guarantees and growth-stimulating infrastructure investment.
Recession
Crisis-stricken eurozone banks may be forced to slash their lending. Businesses, afraid for the euro's future, may cut investment. Faced with a barrage of bad news in the press, ordinary people may cut back their own spending. All of this could push the eurozone into a deep recession.
Unable to borrow from anyone (not even other European governments), the Greek government simply runs out of euros. It has to pay social benefits and civil servants' wages in IOUs (if it pays them at all) until the new drachma currency can be introduced. The government stops all repayments on its debts, which include 240bn euros of bailout loans it has already received from the IMF and EU. The Greek banks - who are big lenders to the government - would go bust.
Meanwhile, the Greek central bank may be unable to repay the 100bn euros or more it has borrowed from the European Central Bank to help prop up the Greek banks. Indeed, by the time Greece leaves the euro, the central bank may have borrowed even more from the ECB in a last ditch effort to stop the Greek banks collapsing.
Source URL: http://www.bbc.co.uk/news/business-18074674
Crisis-stricken eurozone banks may be forced to slash their lending. Businesses, afraid for the euro's future, may cut investment. Faced with a barrage of bad news in the press, ordinary people may cut back their own spending. All of this could push the eurozone into a deep recession.
The euro would lose value in the currency markets, providing some relief for the eurozone by making its exports more competitive in international trade. But the flipside is that the rest of the world will become less competitive - especially the US, UK and Japan - undermining their own weak economies. Even China, whose economy is already slowing sharply, could be pushed into a recession.
Greek debt defaultUnable to borrow from anyone (not even other European governments), the Greek government simply runs out of euros. It has to pay social benefits and civil servants' wages in IOUs (if it pays them at all) until the new drachma currency can be introduced. The government stops all repayments on its debts, which include 240bn euros of bailout loans it has already received from the IMF and EU. The Greek banks - who are big lenders to the government - would go bust.
Meanwhile, the Greek central bank may be unable to repay the 100bn euros or more it has borrowed from the European Central Bank to help prop up the Greek banks. Indeed, by the time Greece leaves the euro, the central bank may have borrowed even more from the ECB in a last ditch effort to stop the Greek banks collapsing.
Source URL: http://www.bbc.co.uk/news/business-18074674
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