Investors worried that these other countries might leave the euro bloc would demand higher interest rates to lend to them. If governments cannot borrow at reasonable rates, they would default on bond payments, hurting the banks that hold such bonds.
The ECB could try to thwart that by issuing unlimited loans to banks. It has done that already, handing out more than 1 trillion euros in December last year and February. That calmed the crisis for a few weeks.
The prosperous so-called core of the eurozone — Germany, France, the Netherlands, Finland and Austria — would likely not escape. Their banks own a lot of the government debt of Spain and Italy. With 1.9 billion euros in outstanding debt, Italy is the third-largest bond market in the world after the US and Japan.
Not everyone agrees that a Greek exit would be a disaster for the eurozone.
Greece is tiny, about 2.5 percent of the eurozone’s 9 trillion euro economy. And it would not be a total surprise. The possibility of a euro exit has been hanging over markets since late 2009. Banks outside Greece have had time to write off their Greek investments — and not make any new ones.
Europe has bulked up its bailout fund to 800 billion euros, though part of that is already committed to earlier rescues.
“A year ago, I would have said it’s too risky, but the situation has changed,” Commerzbank chief economist Joerg Kraemer said, citing the eurozone fund and ECB loans. “The combined fiscal and monetary shield is much higher than it was a year ago.”
“Of course it will cause some volatility in the markets for a while, but in the end, it will not threaten the existence of the currency,” Kraemer said.
Ultimately, a Greek exit from the eurozone would be a terrible blow to the prestige of the broader 27-country EU. The shared currency is a pillar of hopes for a more closely united continent. Its abandonment would also mean the rescue strategy pursued by leaders such as German Chancellor Angela Merkel of forcing Greece to cut its budgets relentlessly has been a failure.
There is no provision in the EU treaty for leaving the euro, though there is one for leaving the EU. Euro exit would put Greece’s relationship with the EU itself in question.