Euro Crisis: “Nice little country you got here. Shame if anything should happen to it.”

Whilst we’re waiting for Turgon’s Greek Tragedy to break, here’s a precise little comment from the Economist:

…the effect of Greek departure from the euro would be disastrous for the country in the short term. Its revenues would be in devalued drachma; its debts in euro. Not just the government but the banks and part of the corporate sector would have to default; capital controls would be needed to stop Greeks moving their deposits abroad; it would have to balance the budget on its own.

Given that Greek GDP is just 2% of the EU total, one might think that the rest of the continent would easily cope. Some banks would lose money but northern European governments could simply bolster their capital, using money they might otherwise have paid the Greeks.

However, the real threat of a Greek default is in the example it would set. Citizens of other European nations would see the chaos; they might figure that their savings would be safer in German, rather than Portuguese (or Italian) banks. Bond investors might feel the same; yields would rise further. Official creditors (including the ECB) might take a hit, making it even more difficult for them to participate in other bailouts.

For all the bluster, one can’t help feeling the tough EU stance is a bit of a bluff. They can’t view a Greek exit with anything other than fear.

Bluff, and double bluff