As the RBS analysts say, the problem isn’t – as some commentators have suggested – that Europe’s troubles would trigger an economic downturn or trade conflicts that would depress demand for US and other foreign goods. These are legitimate concerns but, relatively speaking, fairly trivial.

“Any assessment of the economic impact of a sovereign default of these economies through trade linkages or through their GDP size misses entirely the point,” the RBS report says. “It is the financial linkages that suggest that these economies are too intertwined with foreign financial institutions to default, a phenomenon largely reminiscent of that of subprime … in terms of the potential ramifications that a default would have across the global financial system.”…

[T]he report provides a fairly compelling case for an all-out effort on the part of Greece, other eurozone countries and international financial institutions to prevent a default. The trouble is, however, that – as many commentators have pointed out – the chances look pretty slim that Greece will be able to restore order to its public finances by means of austerity measures and structural economic reform. Putting it bluntly, Greece partied for too long and has almost certainly left it too late to deal with the hangover.