Eurozone crisis: The possible resolutions

What could happen next?

1. Countries muddle through 2. Economy after economy defaults 3. Greece exits the euro

Source: National Institute of Economic and Social Research, UBS, Robert Peston

Leaders introduce measures on a gradual basis to try to contain the problem

A default in one country, such as Greece, forces other vulnerable eurozone economies to default

Allowing or forcing Greece to leave the eurozone

Likely impact

Likely impact

Likely impact

  • Uncertainty and risk remain and the restoration of market confidence is delayed
  • 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
  • Greek devaluation would be certain - as investors would attach a high risk to the country - and default would be likely
  • The lack of confidence has a negative effect on borrowing costs and growth, not just in Greece and other eurozone countries, but elsewhere
  • Portugal is the most likely next candidate for default. Other vulnerable countries include Irish Republic, Spain and Italy
  • 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
  • Recession becomes a near certainty in Japan, Greece, Portugal, Italy and Spain. The probability of a recession in the UK rises to about 70%
  • Defaults by several eurozone countries would make a generalised banking crisis likely
  • 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
Probability of recession graphic Default losses graphic Cost to Greece graphic
  • For the time being, the G20 countries have agreed to boost the resources of the International Monetary Fund to support struggling eurozone economies, such as Greece
  • In order to avert such a damaging outcome, the European Central Bank might need to commit to lending to vulnerable governments
  • On the positive side, defaulting on external debt could act as a boost to the economy, as it would reduce the debt burden of the government. Greece may also see inflows of foreign capital as investors identify opportunities for profit by investing in assets priced in the newly devalued Greek currency

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