Tensions mount in Greece as collateral negotiations threaten to jeopardize the bailout. EU leaders agreed upon in July and Greek banks show signs of stress.
What happens in the worst-case scenario? Pressure intensifies from two sides:
1) Finland recuses itself from the bailout, and other Eurozone countries follow suit. Regardless of continuing participation by Germany and France (not a given, considering Germany’s political situation), this could be enough to make July’s bailout unfeasible.
We could see this scenario play out as soon as next week.
If Germany and France (and maybe Spain and Italy) can get their acts together, they will try to negotiate a different “selective default” solution, which will undoubtedly be more painful.
2) Greek banks are in worse shape than previously thought, and the bailout cannot be implemented before a default takes place. This is probably the worst case scenario. While EU politicians may find a lot more common ground once there’s a fire under them, Greece has a tendency to play down the scale of its economic problems until it’s too late. Essentially, all of Europe would quickly go under. (Click here for a good idea of how that might play out.)
Unfortunately, this second scenario is more likely than anyone would like to think.
Bickering over collateral has emphasised that local politicians will not jump to action until fire nips at their toes. No one in their right mind wants to risk a true default, but the debate over a bailout puts politicians in a politically risky situation.
Germany—despite spearheading the crisis resolution—will not vote on the bailout agreement until September 23. Other countries could take even longer to agree to the plan, and any changes or special requests must be approved by all member states.
Powerless under the current structure of the eurozone, organisations like the European Central Bank or even the International Monetary Fund will be able to do little if the crisis escalates.
Either situation could also entail the breakdown—reorganization would be too kind a word—of the eurozone. Some peripheral nations with profligate spending could find themselves kicked out of the eurozone, or core EU nations could take themselves out voluntarily.
Both situations are also likely to bring about a global crisis.