Does it matter that Greece defaulted?

By Elizabeth Anderson 30 June 2015

As embattled Greece moves closer to bankruptcy, what does it mean for other economies including Britain?

Greece’s economy accounts for less than 2pc of the European Union as a whole

Greece is defaulted on Tuesday evening, as it is unable to pay a €1.6bn debt due to the IMF.

Long, drawn-out discussions with its creditors have failed to produce any emergency cash needed to keep the country afloat, and time is running out for Greece to pay its bills.

The country now faces leaving the euro and reverting back to a national currency.

But what does it mean and why does it matter?

How important is Greece?

In economic terms, the country is relatively small. Greece’s economy accounts for less than 2pc of the European Union as a whole.

Compare this to countries outside the EU and Greece becomes even smaller, representing around 0.4pc of the world economy.

Greece's gross domestic product, a measure of national income and economic output, is around $241bn - which is smaller than some cities in the US.

In comparison, the UK's economic output is $2.5 trillion.

So why does it matter so much?

Greece is not the only country drowning in debt.

While Greece’s public debt is the highest in the EU - standing at 177pc of its national economic output - Italy and Portugal aren't too far behind, with debts of 132pc and 130pc respectively.

If Greece does decide to pull out of the euro, some fear it could lead to "contagion". Investors could panic and start to pull money out of other fragile economies.

A Grexit would also have further significance - it would mean that a borrower, rather than a lender, is calling the shots, and this could cause other indebted economies to re-consider how they manage their debts.

However, the general feeling among analysts is that a Grexit would have limited impact on other countries, certainly in economic terms.

"Contagion is not systemic (simply, not enough financial cross-border risk), it’s purely political contagion fear - this will not turn into a peripheral meltdown (Italy and Spain have made major strides forward)", says Jason Ambrose of Vanda Securities.

What about the effect on other economies?

Markets are the main indication of how major investors are reacting to the Greek crisis at the moment.

While the euro tumbled by more than 1.5pc against the dollar on Tuesday as markets reacted to the possibility of a Greek default, financial markets have since stabilised and there have been few signs of market panic.

Eurozone stocks recovered the worst of any losses on Tuesday, as investors are confident in Europe's ability to fight financial contagion since the height of the financial crisis in 2011.

And what about Britain?

Britain's direct exposure to Greece is limited, although there are indirect risks if a Grexit disrupts economies in the Eurozone, Britain's biggest trading partner.

Chancellor George Osborne has warned that Britain mustn't underestimate the impact of a Greek exit from the euro.

"The Greek crisis has been with us for five years and is one of the biggest external economic risks to the British economy," he said on Tuesday.

A large group of pensioners queue outside a branch of the National Bank of Greece (Credit: Bloomberg Finance LP)

The four largest Greek banks – Alpha Bank, Euro Bank, National Bank of Greece and Piraeus – all have branches in Britain. However, their balance sheets are small, with total deposits of less than £225m.

There are 40,000 British residents in Greece, including 6,000 receiving payments from the Department of Work and Pensions; and around 300 receiving public sector pension payments.

Around 150,000 UK tourists travel to Greece every week in July, and holidaymakers have been warned to take cash with them.

• Greece crisis: What happens next? And how much money does Greece owe?

What about other threats?

Political contagion is potentially a dangerous issue that needs to be addressed. Critics say Greece should never have been allowed to enter the Eurozone in the first place, as it has shown scant regard for rules governing members' debt levels.

Euro leaders will now have to think about how institutions are able to deal with future bail-outs. It is likely to mean a tighter rein on countries' finances. The risk is Greece's example could lead other countries to fall into a debt spiral of borrowing to tide them over until it happens again.

This is already the key source of tension in the Eurozone. Germany, Greece's main creditor, has repeatedly ordered austerity to reduce the country's debt pile.

In response, Greece's Prime Minister, Alexis Tsipras, says he will not administer "austerity in perpetuity".

Does it matter that Greece defaulted? - Telegraph