NEW YORK (CNNMoney) — The immediate threat in Greece has passed. But the crisis is far from over.
The Greeks could decide that they’ve had enough of Germany and France telling them to cut their retirement benefits, make people work longer hours and raise taxes. They could simply say they want out.
The country would default on its debt and abandon the euro currency.
“I don’t see how you have a disorderly default and Greece stays in the eurozone,” said George Magnus, a senior economic advisor at the Swiss bank UBS.
The government would fire up its own printing presses and begin circulating its former currency, the drachma.
Even so, few people want this to happen, or indeed think that it will.
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While the lower-valued drachma would make Greek exports more competitive on the international market and the Greek tourism industry could get a boost, Greek creditors and people with bank deposits in the country would likely lose a lot of money.
Eurasia Group, a political risk consultancy, put the odds of Greece leaving the eurozone at zero in the near term. Global Insight, another consultancy, puts it at about one in three.
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But UBS’s Magnus puts it at 50-50 in the next year or two, and 80% by 2016.
Still, what if? While a worse-case scenario is unlikely, it might look like this:
Bank runs in Greece: If Greece defaulted, the big European economies would likely cut off all aid. The Greek government would be left without new euros coming in or the ability to get credit.
“The economy would collapse to a cash basis,” said Jan Randolph, director of sovereign risk at IHS Global Insight.
Those with bank accounts would rush to get their money. Since even the healthiest banks can only cover a small portion of the deposits, there would be bank failures.
Extreme austerity: The Greek government would be able to spend only as much as it’s taking in, so there would be dramatic spending cuts. The government would have to lay off a huge number of employees.
“Unemployment would surge, going from 15% to 25%,” said Randolph.
Investors panic over Italy and Spain: This is the contagion scenario. Once Greece sets a precedent of leaving the euro zone, investors might think the same is possible for other troubled economies, most notably Italy and Spain.
If investors see that Greece was able to leave the eurozone and default on its debt, why would they lend money to other high risk countries.
This would drive up the cost of borrowing, making it even more expensive for these troubled counties to balance their budgets.
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“Why would anyone want to own any European bonds if they don’t get paid back,” said Magnus.
The good news: This scenario is unlikely. Analysts say the rich European countries have too much at stake to let other countries drop out.
With it’s massive export-driven economy, Germany has been able to use the single currency to sell its goods in other European markets more cheaply than it otherwise could.
“No one has benefited from the eurozone more than Germany,” said Randolph.
Unlike with Greece, it’s likely the rich EU counties would pressure the European Central Bank to make ample cash available for these countries.
Global recession: If Greece leaves the eurozone, Europe may be thrust into another recession, analysts say. In fact, most are predicting Europe is already in or will soon see a slight recession regardless of the Greek outcome.
Mario Draghi, the new president of the European Central Bank, said as much this week: “What we are observing now is slow growth heading towards a mild recession by year end.”
The United States would not be immune, Douglas J. Elliott of the Brookings Institution wrote in a story for CNNMoney. Over $400 billion of U.S. exports in 2010 went to the European Union, and U.S. firms have over $1 trillion of direct investment in the European Union.
U.S. banks and their subsidiaries have $2.7 trillion in loans and other commitments to eurozone governments, banks and corporations — and roughly $2 trillion more of exposure to the United Kingdom.
Still, not all analysts are convinced of the ripple effect.
UBS’s Magnus thinks it would tip the United States into recession, and China would have an even harder time engineering a soft landing for it’s fast-growing economy.
But Randolph doesn’t think there would be too much of an impact, provided other European countries didn’t suffer the same fate.
“In the grand scheme of things, Greece is too small,” he said.