Can Europe survive a Greek debt default?

Skeptics worry that a new $171 billion bailout won't solve Greece's financial woes — and that Athens will inevitably fail to pay its bills As last-minute negotiations over Europe's new $171 billion bailout of Greece rage behind closed doors, concerns are already mounting that the rescue package won't be nearly enough to fix the debt-plagued nation's awful financial mess. Some European Union leaders appear resigned to the fact that Greece will eventually default on its debt — a development that would have been unacceptable a year or two ago. Here, a guide to Greece's gloomy prospects:

This bailout is massive — is $171 billion really not enough?
Not if you're as deep in the red as Greece is. Even if Athens secures the bailout package, Greece's debt-to-GDP ratio will still be as high as 135 percent in 2020. That means Athens' borrowing costs will remain sky-high for years to come. The country is also in its fifth straight year of recession, strangling any hopes of raising new revenue from economic growth. And the government's severe austerity measures, a precondition for securing the European bailout, almost guarantee that the economy will remain in the dumps.

Are EU leaders discussing a potential default?
Not openly. Germany and other European powers insist that they are totally committed to preventing a default and keeping Greece in the eurozone. But the possibility of default burst into the open when Greek Finance Minister Evangelos Venizelos bitterly complained, "There are many in the eurozone who don't want us anymore." German Finance Minister Wolfgang Shaeuble said Germany really does want to help Greece, but would not "pour money into a bottomless pit." He also asserted that Europe was "better prepared than two years ago" to deal with a default.

SEE MORE: Greece's austerity deal: Too little, too late?

What is the worst-case scenario?
It's not pretty. A Greek default could spark a chain reaction throughout Europe, in which suddenly skittish investors drive up borrowing costs for other indebted nations, including Portugal, Ireland, and Italy. If those economies fail, it could spell the end of the euro, as well as Europe's dream of true economic integration. Some analysts predict that a Greek default would hurt just as badly as the devastating collapse of Lehman Brothers in 2008, which sent shockwaves across financial markets and pushed the global economy into a recession. 

And the best?
"It all comes down to whether the default is controlled or chaotic," writes Douwe Miedema at Reuters. The European Central Bank is flooding the market with cheap money, reducing the chances of a credit crunch for European banks exposed to Greek debt. There is also growing confidence that European countries have effectively created a "firewall" around Greece, the U.K.'s Guardian reports. If Europe can avoid a credit freeze and prevent contagion, it could contain the fallout from a Greek default, and even keep Greece in the eurozone.

Sources: Agence France-Presse, Associated Press, The Atlantic, Bloomberg (2), Forbes, The Guardian, The New York Times, Reuters 

SEE MORE: The German economic colossus

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Can Europe survive a Greek debt default?

Skeptics worry that a new $171 billion bailout won't solve Greece's financial woes — and that Athens will inevitably fail to pay its bills As last-minute negotiations over Europe's new $171 billion bailout of Greece rage behind closed doors, concerns are already mounting that the rescue package won't be nearly enough to fix the debt-plagued nation's awful financial mess. Some European Union leaders appear resigned to the fact that Greece will eventually default on its debt — a development that would have been unacceptable a year or two ago. Here, a guide to Greece's gloomy prospects:

This bailout is massive — is $171 billion really not enough?
Not if you're as deep in the red as Greece is. Even if Athens secures the bailout package, Greece's debt-to-GDP ratio will still be as high as 135 percent in 2020. That means Athens' borrowing costs will remain sky-high for years to come. The country is also in its fifth straight year of recession, strangling any hopes of raising new revenue from economic growth. And the government's severe austerity measures, a precondition for securing the European bailout, almost guarantee that the economy will remain in the dumps.

Are EU leaders discussing a potential default?
Not openly. Germany and other European powers insist that they are totally committed to preventing a default and keeping Greece in the eurozone. But the possibility of default burst into the open when Greek Finance Minister Evangelos Venizelos bitterly complained, "There are many in the eurozone who don't want us anymore." German Finance Minister Wolfgang Shaeuble said Germany really does want to help Greece, but would not "pour money into a bottomless pit." He also asserted that Europe was "better prepared than two years ago" to deal with a default.

SEE MORE: Greece's austerity deal: Too little, too late?

What is the worst-case scenario?
It's not pretty. A Greek default could spark a chain reaction throughout Europe, in which suddenly skittish investors drive up borrowing costs for other indebted nations, including Portugal, Ireland, and Italy. If those economies fail, it could spell the end of the euro, as well as Europe's dream of true economic integration. Some analysts predict that a Greek default would hurt just as badly as the devastating collapse of Lehman Brothers in 2008, which sent shockwaves across financial markets and pushed the global economy into a recession. 

And the best?
"It all comes down to whether the default is controlled or chaotic," writes Douwe Miedema at Reuters. The European Central Bank is flooding the market with cheap money, reducing the chances of a credit crunch for European banks exposed to Greek debt. There is also growing confidence that European countries have effectively created a "firewall" around Greece, the U.K.'s Guardian reports. If Europe can avoid a credit freeze and prevent contagion, it could contain the fallout from a Greek default, and even keep Greece in the eurozone.

Sources: Agence France-Presse, Associated Press, The Atlantic, Bloomberg (2), Forbes, The Guardian, The New York Times, Reuters 

SEE MORE: The German economic colossus

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China paper says country does not want to "buy up" Europe

BEIJING (Reuters) - China has no intention of "buying up" or "controlling" a debt-ridden Europe that it still has confidence in, and any help Beijing may offer will be for purely economic reasons, a top state-run newspaper said on Monday ahead of a China-EU summit.

While Chinese leaders have repeatedly expressed confidence in European nations, they have also refrained from making firm financial commitments, urging Europe first to take further steps on its own.

Premier Wen Jiabao, meeting German Chancellor Angela Merkel in Beijing earlier this month, said China was considering increasing its participation in the rescue funds aimed at resolving the debt crisis, though he gave no explicit pledges.

In a suggestion of the tone China wishes to strike at its summit with senior EU officials on Tuesday, Communist Party mouthpiece the People's Daily said in a front page commentary that China's interests lay in selflessly helping Europe.

"China has no appetite or ability to 'buy up Europe' or 'control Europe' as some European commentators have said," wrote Feng Zhongping, director of the Institute of European Studies at the China Institute of Contemporary International Relations.

"China has from the beginning strongly supported the EU and the euro, in clear contrast to the 'talking down' of Europe in the international community," Feng wrote in the piece, carried in the paper's overseas edition.

China has promised not to link helping Europe in the debt crisis with issues such as the EU recognizing China as a market economy or the EU's arms embargo on China, Feng added.

"This is the best example of China's proactive stance on the EU," he wrote.

Any Chinese economic assistance to resolve the debt problem, whether via the International Monetary Fund or the EU's own systems, would be a purely economic decision, Feng said.

"There is thus no such thing as 'the poor person saving the rich person'," he added.

The Beijing summit, which was postponed from December, will bring together Premier Wen and President Hu Jintao with European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy.

The European Stability Mechanism, a 500-billion-euro ($665 billion) permanent bailout fund due to become operational in July, is expected to replace the European Financial Stability Facility (EFSF), a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.

The euro zone must agree and approve a 130-billion-euro ($170 billion) bailout package with Greece before February 15 to allow time for complex legal procedures involved in the bond swap to be completed in time for a March 20 bond redemption.

Failure to strike a deal risks pushing Athens into a chaotic debt default that could threaten its future in the euro zone and worsen the crisis.

(Reporting by Ben Blanchard; Editing by Richard Pullin)

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