A Greek default could precipitate defaults in other euro-area countries



WITH the Greek government perilously close to default, investors and policymakers are wondering whether European banks have caught something nasty. The hard numbers alone thus suggest that a Greek default would do little lasting harm to the rest of Europe's financial system. What is more worrying for Europe's policymakers is the thought that Greece's affliction would spread not just to foreign banks but to foreign governments. Just as Lehman's collapse told investors that a Wall Street bank could fail, a Greek default would tell them that a Western government could renege on its debts. First and second in line would be the next-wobbliest members of the euro zone: Ireland, whose government has debts of around €150 billion, and Portugal, which owes €160 billion. Partly because they have also reduced their holdings of Irish and Portuguese bonds, European banks should be able to cope if these countries joined Greece in default or in restructuring their debts. However, if contagion were to spread to Spain or Italy, and banks had to accept losses on their governments' bonds, the sums would look grim even for some banks outside the affected countries. Italy owes €1.8 trillion, or 120% of a far bigger GDP than Greece's, Ireland's or Portugal's.

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