The Economist on Why Greece Matters

OR why Paul Krugman should put more thought into his work here:

There is no reason for the Greek government to default. It is not in its interest and it can service its debt, whose size is half that of the Japanese government and the same order of magnitude as that of many other governments, including soon the UK and the US...Yet, markets can force the government to default if they refuse to refinance the parts of the debt that reach maturity. This is a pure case of self-fulfilling crisis...

A debt default by the Greek government, on its own, would be a non-event. Greece is a relatively small country (with 7 million people, its GDP amounts to less than 3% of Eurozone’s GDP). Contagion to Portugal, which is even smaller, would also be a non-event. Moving on to Spain and Italy is another matter...

The real worry is the banking system. Some European banks hold part of the Greek debt and, if still saddled with unrecognized losses from the subprime crisis, some might become bankrupt. Many governments have simply not pushed their banks to straighten up their accounts and they are now discovering some of the unforeseen consequences of supervisory forbearance...

Contagious debt defaults, along with bank failures, could lead to a double-dip recession in Europe, possibly affecting the US as well. If that were to happen, with the interest rate at the zero lower bound and fiscal policy not available any more, we could face a terribly bad situation.