My thoughts (in no particular order):
- Before confidence is restored in Greek government debt, a floor for the price of the bonds must be found. In my picking around, I would not be surprised if this low limit was between 30 and 40 cents on the dollar. Only at this level will people start to buy.
- If the above is true, there will be problems for sure. I am mainly looking at the "PIIGS" countries (Portugal, Ireland, Italy, Greece and Spain). These are countries with a lot of sovereign debt and bailout-taxed public coffers. I think Portugal and Spain would be the first to experience similar problems to those of the Greeks.
- If Portugal and Spain go south, look out. This could lead to a complete loss of confidence in the PIIGS countries to meet their debt obligations. This, to me, would signal a major defeat for the very idea of the euro as a currency.
- Can the euro survive such a scenario? Possibly, if the "eurozone" is severely contracted. France, Germany and the Benelux countries might form a core of "strong" euro countries that might see the currency live yet.
- I find the above situation rather unlikely or (more specifically) irrelevant, seeing as France, Germany and the Benelux countries already have such huge sway over ECB policy.
- Another complicating factor is that we are seeing a sovereign debt crisis in the first real-world trial of an optimal currency area. There have been sovereign debt crises before (remember the "Asian congagion" in 1997, Russia in 1998 and Argentina in 1999-2002?), but never one with the potential for regional or global implications like this one.
- This might be the tipping point for the "double-dip" recession, more specifically, the second of the dips. During the Great Depression, it seemed that the worst was over by mid 1930, but a spate of bank failures (starting with Austria) led to things getting a lot worse.
- Would this have happened had the euro never existed? Yes and no. Yes, because Greece would have inflated the drachma (or Spain the peseta or Portugal the escudo) to get out of this. No, because in this case, the potential for systemic failure would have been lower.
- Eurozone countries, and espeically the PIIGS countries, will continue to be hesitant to have a more American-style rating system for their government debt. It will limit their policy leeway in inflating/deflating the currency. On the other side, some fucking good it did us when it came to consumer mortgages.