What consequences would a Greek default have? My answer would be very different depending on, consequences – for whom. For Greece, in my opinion it would be devastating. Locked out of debt markets and without further aid, Greece would have enormous difficulty finding funds to pay government workers and cover other public expenses, worsening its already-weak economy.
On the other hand, the effect on Europe would be immaterial, with Greece’s GDP making up only 2% of the Eurozone economy. Unlike in 2011, the chance of contagion to the rest of the European periphery (such as Ireland and Portugal) is small – these countries have implemented the required structural reforms, and their economies improved. In addition, after the start of its QE program this year the ECB now serves as back-stop if any contagion does occur, standing ready to buy those bonds at any price it considers too low. The Greek drama has continued for most of this year. When it ends, markets might just shrug it off.
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