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23rd Jun 2018

Study: Greek euro-exit could start €17tn 'wildfire'

  • Spanish anti-austerity protesters burn EU flag in Madrid (Photo: tom.tziros)

The nightmare scenario of Greece, Italy, Portugal and Spain leaving the euro could cost the world economy €17 trillion, a new study says.

The figure - totted up by German consultancy Prognos for the Berlin-based Bertelsmann foundation - would amount to "a lengthy worldwide recession" stretching from the US to China and to "major strains on the social fabric and political stability" in the euro-departing countries.

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The study admits the consequences of a Greek exit - until recently mooted as a real option by top German policymakers - are a "mystery."

But it notes that a "domino" effect in which "capital market speculation and other untoward responses ... provoke sovereign default on the part of Portugal, Spain and ultimately Italy" is possible.

The EU treaty has no mechanism for expelling countries from the eurozone.

But if creditors stop shovelling bailout money into Greek coffers, Athens would have nothing with which to pay for healthcare, police or pensions, forcing it to introduce its own currency and to rely exclusively on internal tax income.

The Prognos scenario posits that a return of the drachma in 2013 would force Greece to write off another 60 percent of its debt.

The write-down would cause huge losses for private banks and sovereign creditors, creating a spiral in which lenders such as France, Germany and EU bailout funds, the ESM and EFSF, see their credit ratings go down and their borrowing costs go up.

The new drachma would also be worth 50 percent less than the euro.

The devaluation would mean that Greece's extant 40 percent euro-denominated debt would cost twice as much to service.

It would also ossify economic growth by destroying the confidence of business investors and average people's appetite for mortgages and spending.

Prognos said a Greek exit would cost the world economy €674 billion between 2013 and 2020. Greece would lose €164 billion and Germany €73 billion.

If Portugal goes as well, it would cost the world €2.4 trillion. Portugal would suffer an €84 billion loss and Germany €225 billion.

The Greece-Portugal shock would send ripples around the world - US GDP would fall by €365 billion and the Chinese economy would lose €275 billion.

Adding Spain, the world would lose €7.9 trillion, with costs escalating for France (€1.2 trillion), Germany (€805 billion) and the US (€1.2 trillion).

If Italy goes too, the figures balloon to €17.2 trillion worldwide, €2.9 trillion for France, €1.7 trillion for Germany, €2.8 trillion for the US and €1.9 trillion for China.

"In the current situation we have to make sure that the crisis in Europe does not turn into a wildfire," Bertelsmann chairman Aart De Geus said in a note accompanying the report.

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