- Greece's exit from the euro would lead to real contagion for the rest of the European periphery
- Greece would be defaulting on $450bn of sovereign debt--the largest in history
- European policymakers would be gravely mistaken to underestimate the fallout of a Greek default
Sir, Lex’s suggestion (“Discomfort zone”, December 30) that an orderly Greek exit from the euro should be manageable because Greece constitutes only 2 per cent of the overall eurozone economy is all too reminiscent of the policy complacency that preceded the Lehman bankruptcy in September 2008.
One has to reckon that Greece’s exit from the euro would lead to real contagion for the rest of the European periphery and that could precipitate a European banking crisis. It would do so in much the same way as the widely anticipated collapse of Lehman, a supposedly relatively small US bank, triggered contagion throughout the global financial system.
It is not simply that Greece would be defaulting on about $450bn of sovereign debt, which would make it the largest sovereign debt default in history. Rather, it is that the lie would have been given to the repeated assurances by European policymakers that no eurozone country would either default or exit the euro.
Especially against the backdrop of widespread Greek bankruptcies and runs on the Greek banks, one has to anticipate that there would be similar bank runs and the drying-up of external funding to the banks in Ireland, Portugal, Spain and Italy. This would throw into question the serviceability of these countries’ sovereign debts worth more than $4.5tn.
Lex is almost certainly right in suggesting that a Greek exit from the euro is both almost inevitable and the preferred course of policy action. However, it would be a grave mistake for European policymakers to underestimate the fallout from such an occurrence.
Desmond Lachman is a resident fellow at AEI