Greece, responsible for 0.4 percent of the world economy, now poses a threat to international prosperity as investors raise bets its days using the euro are numbered.
A Greek departure from the currency would inflict “collateral damage,” says Pacific Investment Management Co.’s Richard Clarida, a view echoed by economists from Bank of America Merrill Lynch and JPMorgan Chase & Co. At worst, it could spur sovereign defaults in Europe as well as bank runs, credit crunches and recessions that may spark more euro exits.
“If you let Greece go you would be sending the message that being a member of the euro zone is not necessarily permanent, which could be a disaster for some countries,” said Laurence Boone, chief European economist at BofA Merrill Lynch in London. Her primary scenario is that Greece remains within the euro because of the high cost of the alternative.
“The election will turn on the economy and the economy is significantly affected by Europe,” Eichengreen said. “The longer it remains unresolved and the more volatility it creates the worse it is for Obama.”
Global central banks may also help out by pumping dollars around the world and pursuing easier policies where they can, said Nariman Behravesh, chief economist at Englewood, Colorado-based forecasters IHS Inc. The International Monetary Fund has already won pledges of new resources to help fight crises.
Greece’s exit could also spur bank runs and capital flight in Europe’s peripheral countries as investors flee corporate bankruptcies or try to escape redenomination of their accounts. European banks alone hold $1.2 trillion of debt issued by Spain, Portugal, Italy and Ireland, according to the Bank for International Settlements in Basel.
Chinese exports, 19 percent of which go to the European Union, slowed unexpectedly in April. They may fall 3.9 percent this year if Greece leaves, compared with a 10 percent gain without an exit, CICC projected.