By business editor Ian Verrender.
With the worsening economic situation involving Greece heading further into uncharted territory, resolution to the country’s deepening debt crisis seems nowhere near sight.
Fears of a default, and the consequences it could have on regional stability, have been heightened in the eurozone after the European Central Bank (ECB) said it would not increase support for Greek banks.
But who would be the real losers, how extensive will the fallout be and should Greece leave the European Union?
1. Who will lose?
Greece, as the founder of modern democracy, will spread the pain far and wide but the greatest impact will be felt by ordinary Greeks.
Presuming it is even possible, if Greece leaves the European Union it will have a devastating impact on its already shattered economy.
Asset prices will plummet, inflation will soar, unemployment will be rampant and its economy will collapse.
In terms of the pure cash effect, Greece’s exit will crystallise losses on all outstanding loans from EU nations – through the European Central Bank and emergency funding – currently standing at about 331 billion euros ($480 billion).
Germany and France between them account for 176 billion euros ($255 billion), almost half the total.
Then there is the private debt held by banks. Greece owes German, French and British banks roughly 30 billion euros, and the IMF holds a similar level of debt.
If the nation goes into default and is forced out of the eurozone, these countries would have to write off Greece’s debts; that is a pretty strong motive to keep Greece in the tent.
2. Why does it matter?
With a gross domestic product of $US242 billion, Greece’s economy is about half the size of NSW, and while its debts are substantial, alone they are not enough to plunge Europe into crisis.
But that was the same argument used during 2007 when America’s property market began to implode.
Finance is global and the linkages are often hazy, breeding suspicion and fear about who is exposed and for how much. When that happens, no-one will lend and finance grinds to a halt.
The merest hint of bank collapses sends fear through financial markets.
Then there is the prospect of contagion, that other European nations could follow Greece and fall foul of repayment commitments.
Should that happen, the EU would face collapse.
3. How did it get to this?
Greece should never have been allowed into the European Union. Like many of its neighbours, it has never adhered to the rules governing member’s debt levels.
But when compared with the size of its economy, Greece’s initial debt was somewhere west of Pluto.