There is a lot of debate right now about whether or not Greece should exit the Eurozone, and what that might mean for stabilization of the region. There are a few reasons why that’s important. The first is that the union was created to try and stave off tensions between nations. A common currency was adopted to encourage citizens to pass through each other’s countries, and the idea was to strengthen the bonds between nations.
If Greece were to leave this union, the most immediate consequence would potentially be a political fallout of sorts. However, Greece faces a huge financial risk in making this choice.
Sovereign default destroys a country’s credit rating. When the US was downgraded a single grade in August of 2011, the stock market dropped by 7% in a single day. When that government requires a loan later, other countries may ask for higher compensation in the form of interest rates.
We are seeing some of the effects of sovereign default already. Immense pressure is being placed on Greece to repay its loans, and the country has already taken an extensive haircut by cutting its pension plans dramatically.
In such extreme cases, some economists argue that it might be best for that nation to restructure its own debt in what is known as an “orderly default.” Specifically related to Greece, there is a chance that delaying an orderly default might hurt the rest of Europe in the process.