Eurozone crisis: The possible resolutions
BBC Nov 2011
What could happen next?
Option 1. Countries muddle through
Leaders introduce measures on a gradual basis to try to contain the problem
Likely impact
•Uncertainty and risk remain and the restoration of market confidence is delayed
•The lack of confidence has a negative effect on borrowing costs and growth, not just in Greece and other eurozone countries, but elsewhere
•Recession becomes a near certainty in Japan, Greece, Portugal, Italy and Spain. The probability of a recession in the UK rises to about 70%
Option 2. Economy after economy defaults
A default in one country, such as Greece, forces other vulnerable eurozone economies to default
Likely impact
•Once Greece defaults, other countries become more likely to default as investors become worried about risks in the region. Other European banks and pension funds that hold large amounts of Greek debt would also face losses
•Portugal is the most likely next candidate for default. Other vulnerable countries include Irish Republic, Spain and Italy
•Defaults by several eurozone countries would make a generalised banking crisis likely
Option 3. Greece exits the euro
Allowing or forcing Greece to leave the eurozone
Likely impact
•Greek devaluation would be certain - as investors would attach a high risk to the country - and default would be likely
•A run on Greek banks would follow, meaning a collapse of the Greek financial system. International creditors would incur huge losses, Greek businesses would go bust, and the Greek people would face high inflation
•Other possible consequences are mass emigration, especially of skilled labour, towards other EU countries offering higher wages. There could also be new barriers to trade. Overall, UBS estimates leaving the euro would cost every Greek person up to 11,500 euros in the the first year
SOURCE: NATIONAL INSTITUTE OF ECONOMIC AND SOCIAL RESEARCH, UBS, ROBERT PESTON