BRUSSELS (AP) — European leaders have struggled mightily to keep Greece in the eurozone, despite the drag that its economic weakness places on their growth. The reason is this: If Greece abandons the euro, the chaos it would wreak on the global economy can hardly be overstated.
A Greek exit from the euro would almost certainly cause the country to default completely on its debts. A bankrupt Greece would be unable to pay pensions and salaries, and there would be a run on banks, causing them to collapse as people lined up to withdraw euros before the currency changed to drachmas.
Greeks owing money in euros but being paid in drachmas — essentially, a huge currency devaluation — would find their debts suddenly too large to pay, and would go bankrupt themselves. In a country where street violence accompanies even minor civil servant demonstrations, that's a volatile mix.
And for any help, the only place Greece would be able to turn would be the International Monetary Fund, which is already one of its bailout creditors and would insist on even more austerity measures in return for rescue loans, bringing the entire equation full circle.
Beyond Greece, the consequences would be even more dire.
Rather than 50 percent losses on Greek bonds that the banks have already said they can handle, private creditors would see those bonds simply disappear. Eurozone countries, the European Central Bank and the IMF would also give up hope of getting back the money they lent Greece.
Above all, a messy default would trigger massive insurance payouts on those bonds. Because financial groups do not usually disclose how much they hold in sovereign debt, such as Greek bonds, global markets would be seized by a panic over who would collapse.
That would essentially be a repeat of what happened in 2008 after U.S. investment bank Lehman Brothers failed — only worse.
The uncertainty would likely push other weak eurozone states like Italy and Spain from chaos into disaster. And failures that size would destroy the euro altogether.
Already, Italy's borrowing rates have jumped to record levels at the mere thought of a Greek default. If Greece does default, investors would be prone to think that other countries might, too — and they know full well that Italy's economy is too big for Europe to bail out.
French President Nicolas Sarkozy claimed it would never come to that.
"We cannot accept the explosion of the euro, which would mean the explosion of Europe," he said in Cannes at a summit of leaders from the Group of 20 most powerful economies.
But Europe's defenses are still weak. If it were aggressive in buying national bonds, the European Central Bank might be able for a time to keep a lid on those borrowing costs before they rose to the point that Italy's government would no longer be able to finance itself on capital markets.
On the other hand, if the ECB were to shy away from such an approach then the risk of contagion would grow. The ECB made clear Thursday it is uncomfortable playing such a role.
Greece appeared to step back from the brink on Thursday and canceled plans for a referendum. If its feuding politicians can agree to the plan launched in Brussels last week, they'll get the next batch of euro8 billion ($11 billion) in bailout money.
But even then, the problems are far from over.
True, the agreement would reduce Greece's debt — but not by much. In 2020, in the best scenario, Greece would have the same level of debt that it did three years ago.
When the crisis began.
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Don Melvin is the AP's news editor in Brussels and can be reached at http://twitter.com/Don_Melvin
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