FRANKFURT, Germany — Greece's economy is small, but the shock waves from a default on its debt could be amplified by links in the global financial system to hurt stocks, banks and entire economies far from the epicenter in Athens.
In Greece, banks could go bust, overwhelming the government's ability to bail them out, and lenders in France, Germany and elsewhere in Europe could suffer serious losses.
And the resulting market turmoil could strain the European Union's backstop fund, pushing European leaders to drum up yet more taxpayer financing, with voters already annoyed at funding other people's failed governments.
The exact effects of a Greek debt implosion are hard to anticipate, in part because no one knows how big the losses would be for bond holders, who stand first in the chain of dominoes. Beyond the immediate hit to banks, the biggest fear is that of contagion — a difficult-to-predict chain reaction that could roil markets and make it harder for other indebted countries to cope with their debts, with the result being higher borrowing costs for eurozone countries.
Some even say the end of that road could be one or more of the weakest euro members — such as Greece — leaving the shared currency, though the political will to prevent that remains strong.
Some are comparing a Greek default to the collapse of U.S. investment bank Lehman Brothers in September 2008, which triggered the most severe phase of the world financial crisis, freezing credit markets and leading to a slump in global trade.
"The risk of a 'Lehman moment' for the eurozone is increasing," says Neil MacKinnon, analyst at VTB Capital. "The nature of the eurozone debt and banking crisis is similar to previous financial crises in modern times because of the interconnectedness between the banking sectors and government debt."
Financial trouble can hit the wider economy if banks suffer losses that make them afraid or unable to lend to businesses. The International Monetary Fund has identified bank trouble as the biggest risk to Europe's recovery.
Markets would then wonder whether bailed-out Ireland and Portugal would also default, making it harder for them to return to borrowing markets.
For now, most observers and market participants expect some kind of new aid deal to tide Greece over in the short term — but fears that the EU might fail at that task is sending stock markets and the euro lower, after Greece's government called a confidence vote over its struggle to impose more spending cuts on its unhappy constituents.
That follows eurozone finance officials' inability to agree on conditions for a new aid package.
Nout Wellink, a member of the European Central Bank's rate-setting council, said European governments need to be ready to double the size of their bailout fund to $2.1 billion — a prospect that cannot please German Chancellor Angela Merkel, who faces unrest in her government's ranks over Germany's role as the leading funder of bailouts.