The bad scenario that the EZ is trying to avoid is a Greek default, leading to contagion in other weak EZ members. While the EU probably has the resources to rescue both Greece and Portugal, it does not have the resources to rescue Italy or Spain. So here are some questions:
- Can Greece regain market access over a reasonable time period, such that the EU does not have to assume all of its debt?
- As Greece's bonds decline in price and its ratings continue to decline will banks have to begin to take writedowns this fiscal year?
- If Greece cannot regain market access (and most observers are skeptical), will the EU be willing or able to refinance all EUR 300 billion of Greece's sovereign debt as it matures?
- If the bailout becomes a protracted affair, what would happen if Greece failed to meet its fiscal targets (as is very likely)?
- Assuming that Greece is supported for this year, is that enough time for Portugal, Spain and Italy to show sufficient progress toward their deficit reduction targets such that they keep market access?
- If Greece ultimately defaults and contagion spreads to one or more other EZ members, what is Plan B?
- In the event of one or more EZ government defaults, what are the implications for the exposed banks in France and Germany?
- Can a firewall be drawn around the northern European banks in the event of major government defaults?
- Will the ECB be willing to engage in unorthodox manoeuvres in order to offset the deflationary impact of either (a) massive fiscal consolidation in the EZ and/or (b) sovereign defaults?
- If not, what is the outlook for nominal GDP growth in Europe over the medium term?
- And what are the implications for global growth given this situation?
- Can the US grow while Europe shrinks?
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