What would happen if Greece exited the eurozone?

Rumors are rife of a Greek exit from the eurozone. While no country has yet dropped the common currency, there are some indications of what will transpire if Greece does.

Would a Greek exit be expected to have a domino effect, or will it be possible to isolate Greece?

This is what concerns EU leaders most. Their answer is that the European Stability Mechanism (ESM) – the rescue fund which will be operational in July and will contain €500 billion – will be there to bolster other struggling European economies.

But the fears among investors are still there.

“A Greek exit sets a dangerous precedent,” says Jane Foley, senior foreign exchange strategist atRabobank in the City of London. “Huge amounts of investors are trying to get out of Spanish bonds right now, because they fear that if Greece goes, Spain will be next.”

Consequently, the interest rates for Spanish 10-year bonds climbed to over 6 percent this week.

What EU policy makers have to do now, says Ms. Foley, is reassure the world that Greece is a one-off. “If Greece leaves unilaterally and in a more or less orderly fashion, contagion might be avoided.”

Given the social unrest Greece is already experiencing, and given the capital flight taking place right now – according to President Karolos Papoulias, Greek citizens withdrew €700 million from banks last week alone –  an orderly exit is far from certain.

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