Greek Debt Crisis: Anil Kashyap, University of Chicago
The political contagion is much harder to assess. Perhaps if Greece emerges in better shape in the medium term, then other countries will follow. Tsipras was betting that this concern would be so powerful that Europe would never take this risk.
.. But, if the public sides with Tsipras government, then there will be a very sharp recession over the next few months. Tax collection is likely to collapse. The Tsipras government is unlikely to survive the economic collapse.
.. If the post-Tsipras government opts to proceed with the default, then the next big unknown is how long before the economy stabilizes. At some point Greece will be a very attractive tourist destination, and its goods that are no longer priced in euros will be more competitive, so at some point the economy will begin to turn around. Whether this takes months or quarters will depend on many decisions that are difficult to forecast now.
.. The IMF is likely to be criticized further for the recommendations it made, particularly in 2010. Perhaps it will be reformed to limit its discretion in lending. Traditionally the head of the IMF has been a European. That is very likely to change since many countries believe that Greece was treated preferentially because it was a European country.
.. The ECB can definitely continue even if Greece defaults. The ECB has provisions set aside to cover some losses. It also is making lots of profits on the bonds it owns (that it pays for with money that pays no interest). So the Greek losses per se are not a problem. A default by a larger country such as Italy or Spain would be very different
.. Greece should have defaulted in 2010. Its debt burden then was unsustainable and nothing since then has changed this. It is true that financial markets were much more jittery at that time, but the money that was raised to pay off the creditors in that bailout could have been diverted to support Greece and other weak countries. Once the bad rescue of 2010 was undertaken, it was inevitable that some form of debt relief was going to be necessary. Imagine how different the political dynamics in Europe would have been if the German and French banks had been explicitly bailed out.