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6. Can the eurozone contain the contagion?
This is the biggest unknown. If the eurozone authorities could persuade investors and the public that Greece was a special case, the effects of an exit could be contained. If not, a Greek exit would soon become a disorderly break-up of the euro project.
The inevitable question after a departure is: “Who’s next?” Eyes would turn rapidly to Portugal, which followed Greece into the bailout club. Investors would sell Portuguese bonds, seek to extract money from the country’s banks and take euros across the border for fear of an exit and devaluation. Currency risk has been evident in the European banking system since late last year, but the incentives to move deposits into German banks from those in Portugal, Ireland, Spain and Italy would be clear.
If the political will to hold the single currency together exists, the eurozone has a big weapon in its arsenal to contain the contagion: unlimited action by the ECB. It could restart bond-buying at very high levels to limit rises in sovereign bond yields and offer unlimited liquidity to peripheral-nation banks to offset a run on deposits. This would worry Berlin, which feels the ECB has already gone too far in underwriting bank and sovereign debt in peripheral countries. But the alternative is worse, as the EU has no other sufficiently powerful defence against a systematic bank run in such nations.