Chart of the day: The Grexit decision tree
The Financial Times has gone through the very useful exercise of creating a decision tree on what a Greek exit from the euro zone entails. I think the Europeans are now actively preparing for a Grexit because to not do so would be folly. But that doesn’t mean that they want Greece to be forced out. Much of what we hear for public consumption is real. But much of it is also political posturing to improve negotiating positions. This decision tree can be helpful in figuring out what’s real and what’s just bluff.
Source: Consequences of a Greek eurozone exit, Financial Times
The problem with a greek exit is that it clearly opens up the prospect of exits of others. That is effectively contagion. If they can keep Greece within the Eurozone and provide funds to allow Greece to restructure then it will end the contagion very rapidly. Though what it will mean is that the periphery will have to default on much of the debt, especially all the bank debt. That will give Europe a chance to do an Iceland and default on much of the debt and that will improve fiscal balances immediately. The banks will probably be wiped out but they were not lending anyway. It will restore moral hazard to banking and give central banks the ability to create new rules that ensure stability permanently, without the banks lobbying against them.