Mission Impossible: Counting the Cost if Euro Economy Fails

A genuine hint that Greece might throw in the towel could trigger a market mayhem Greece's exit from the euro zone will inflict untold damage on Europe's economy, further burnish the attractiveness of a rising Asia and hasten the emergence of China's yuan as a global currency.  Until recently, even thinking about the consequences of a break-up of the euro was, well, unthinkable. No longer. Doubts over how much more austerity recession-hit Greece can endure are growing by the day. They are matched by doubts as to how long political and public opinion in Germany, the eurozone's paymaster, will stand for keeping Athens and others on the bloc's periphery afloat with emergency loans and bond purchases by the European Central Bank.  Some within the ECB are equally unhappy about it. If the outcome of the mounting crisis is unpredictable, so are the consequences. Domenico Lombardi with the Brookings Institution, a Washington think tank, said the economies of the euro zone are so inter-connected that the secession of one of the 17 members would open up a Pandora's box.  Greece could not quit or be expelled from the bloc in a surgical manner. Markets would then line up Italy in their sights. If Rome were then forced out, France's banks — already under pressure from short-term funding strains — could melt down because of their exposure to Italian debt. "It would be almost impossible to draw the line. You could devise a framework for an orderly exit in normal circumstances, but we have gone much too far for that," said Lombardi, a former executive director of the International Monetary Fund. He put the chances of a eurozone breakup at fifty-fifty.  Even though Greece's travails are well known, a genuine hint that it might throw in the towel would trigger market mayhem, with Italy particularly exposed, said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London consultancy. "The fear and panic that this would cause is incalculable," Spiro said. "The issue is whatever happens in Greece is perceived as a template for what could happen elsewhere. It would be disastrous for Italy."  AGreek exit is often viewed as positive for the euro's exchange rate, said William Buiter, Citi's chief economist. "We fear, however, that it would be a financial and economic disaster not only for Greece, but also for 16 continuing euro area member states, and that it would also have severe economic and political implications for the whole of the EU and the wider global economy," Buiter said in a report issued on Tuesday.  The rush to safe-haven assets and to square positions after a break-up of European Monetary Union would be akin to the aftermath of Lehman's default, according to Seamus Mac Gorain with JP Morgan Securities in London. He argued that the dollar would be the currency to benefit most from what would be a "seismic" event. "For one, heightened volatility would prompt investors to buy back funding currencies. Second, euro break-up would undermine its challenge to the dollar as a reserve currency." —Reuters Some analysts put the chances of a eurozone break-up at fifty-fifty