A possible bankruptcy in Athens has not been taken off the table despite the razor thin margin by which Greek PM Papandreou won the vote of confidence. But what would actually happen if Greece did go bankrupt?
The European Union has temporarily turned off the money spigot for Greece. So long as Athens has not clearly demonstrated that it will accept the rescue package, which is conditioned with tough austerity measures, then the next tranche of bailout money to the tune of 8 billion euro ($11 billion) will not be paid out. Originally, the money was supposed to be transferred to Greece on Monday.
If the money doesn't come, then the Greeks will slide into a disorderly state bankruptcy. An orderly bankruptcy already occurred on October 27th during the European summit when the banks and other financial institutions agreed to write off 50 percent of Greece's obligations. A second rescue package of 100 billion euro and the 400-billion-euro European Financial Stability Facility (EFSF) would then help to ease the consequences.
If it comes to a sudden bankruptcy, then the southeastern European country would fall into economic chaos. The national government in Athens would no longer be able to pay state officials, water and electricity would be shut off and companies would slide one after the other into insolvency. Athens would also stop servicing its debt. That would affect, above all, Greek banks because the state owes them around 60 billion euro.
"Greek banks would experience a run on their deposits," Christian Schulz, a financial analyst with the Berenberg Bank in London, told Deutsche Welle. "Greek investors might try to withdraw their money from the bank and send as much of it as possible abroad."
Greece would experience a deep financial and economic crisis and an exit from the 17-member eurozone could then follow. There is no legal foundation or precedent for such a scenario, although contingency plans are being considered.
"Some are already playing with the idea that Greece could leave the EU for a very short period and then immediately re-enter," Jürgen Matthes with the Cologne Institute of Economic Research, told Deutsche Welle.
Greece would then be treated like the 10 other EU member states that either have chosen not to adopt the euro or who are not ready to introduce the currency.
The Greek government could then attempt to re-introduce the old Drachma. The new Drachma would be de-valued by up to 50 percent compared to the euro, according to experts. Greek exports would indeed become immediately more competitive, yet that would hardly make the situation easier for Greece because the country's obligations would still be denominated in the euro, Matthes said.
"That would make Greece's debt burden much higher," he continued. "And that would lead to an even larger debt write-off."
That would potentially have drastic consequences for the banks of other European countries because they have lent the Greek state around 120 billion euro. Europe would be able to absorb this hit. It's not the bankruptcy of one particular bank or another that has created concern, but rather a contagion within the eurozone that would choke the economies of entire nations.
In this context, Italy has already been named as the greatest concern. Most experts believe that the Italian economy is robust.
"But Italy carries a very high sovereign debt burden that has to be constantly re-financed," Schulz, from Berenberg Bank, said. "If the markets cannot give Italy the means to re-finance anymore, then Italy could slide into bankruptcy."
Italy already is receiving help from the European Central Bank (ECB). Because the risk premiums for Italian government bonds have reached record highs, the ECB has stepped in and begun buying the bonds in order to keep Italy's interest rates at a manageable level. If Italy suffocated under its interest rates and became insolvent, then the future existence of the eurozone could no longer be guaranteed.
"France would then be affected and it would become difficult to imagine how the eurozone could continue to exist in its current state," Schulz said.
The global financial system would risk collapsing. In order to bring the situation under some semblance of control, Europe would need help from abroad.
"In the end you would be in a situation where you would definitely need help from outside, from China and other states," Matthes said. "That is a scenario that nobody wants to imagine in detail."