By business editor Ian Verrender Mon 29 June 2015
Photo: Greek PM Alexis Tsipras has sought to negotiate a new bailout deal with Greece's creditors. (Reuters: Alkis Konstantinidis)
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.
For years, it managed to hide its real debt courtesy of a complex financial instrument organised by Wall Street powerhouse Goldman Sachs. That ruse came unstuck when the Global Financial Crisis hit and left the country and the single currency bloc exposed.
Rather than deal with the crisis in 2010, or the latest flare up in 2012, European Union officials instead perfected the art of obfuscation.
Greece will never be able to repay its debt. At 178 per cent of GDP, it is simply unsustainable. Austerity has caused the economy to shrink, blowing out the debt even further.
There are only two choices. Either a good chunk of the debt needs to be written off or Greece needs to leave the European Union.
Even after all this time, no-one has the stomach for either.
4. Why is default so catastrophic?
Under normal circumstances, a default is not catastrophic.
Iceland did it in the aftermath of the financial crisis and Argentina went into default last year.
In fact, Google "Argentina default" and you end up with "Argentina default history". The South American nation has defaulted seven times since independence from Spain in 1818.
A default will put a nation in banking's bad books. The currency will collapse and the cost of imports normally soars, but a default allows a fresh start as Iceland has proven.
The problem for Greece is that it relinquished its currency and recreating it would be a logistical nightmare. It would be a little like Adelaide or Sydney defaulting on a debt to Canberra.
Mechanisms exist for nations to join the single currency, yet no plan exists for a nation to exit.
5. Can Greece and the EU survive?
Greece has exposed the shaky foundations of the European Union. After centuries of brutal conflict and war, the idea of a single currency as a means of unification was brilliant.
From an economic standpoint, however, the euro has worked to the advantage of the rich and powerful nations, such as Germany, but to the detriment of poorer nations like Greece.
The poor economic performance of the southern European nations drags down the value of the euro. That is great for a country exporting BMWs and Mercedes Benz cars to China.
But the robust economic performance of a country like Germany makes the poor nations uncompetitive because of the euro's relative strength.
Greece, along with Italy, Spain and Portugal would be much better off with a weak currency that spurred their home industries and made them globally competitive.
So what is the answer? There is not one.
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